Markup vs Margin

Confusing markup and margin is one of the most common—and most expensive—mistakes new business owners make. While both terms are used to describe profit, they are calculated differently and yield completely different percentages. If you mix them up, you could end up pricing your products at a loss.

What is Markup?

Markup is the percentage you add to the cost of a product to determine its selling price. It looks at the profit as a percentage of your cost.

If a product costs you $50 to make, and you want to make $50 in profit, you set the selling price at $100.
Your profit ($50) divided by your cost ($50) equals 1.0.
That is a 100% markup.

What is Margin?

Margin (specifically Gross Margin) is the percentage of the selling price that is profit. It looks at the profit as a percentage of your revenue.

Using the exact same example: You sell the product for $100, and your profit is $50.
Your profit ($50) divided by the selling price ($100) equals 0.5.
That is a 50% margin.

The Mathematical Difference

As you can see, a 100% markup is the exact same thing as a 50% margin. Margin will always be a lower percentage than markup.

Here is where the danger lies: Let's say your accountant tells you that your business needs a 30% margin to cover overhead and stay profitable.

You buy a product for $100. You accidentally use a 30% markup instead of margin, so you price the item at $130.

• Your Cost: $100
• Selling Price: $130
• Profit: $30

What is your actual margin? $30 (profit) ÷ $130 (selling price) = 23% Margin.

Because you confused the terms, you missed your target margin by 7%, which means your business might lose money on every sale.

How to Price Your Products

To hit a specific target margin, you must use a larger markup. Here is a quick reference table for common pricing conversions:

Don't want to do the math by hand? Use our Profit Margin Calculator to instantly convert between cost, markup, margin, and final selling price.