Markup vs Margin

Markup and margin both describe the profit on a sale. The difference is the base each one is measured against:

• Markup = Profit ÷ Cost
• Margin = Profit ÷ Selling price

Buy an item for $40 and sell it for $60. The profit is $20, so the markup is 20 ÷ 40 = 50% and the margin is 20 ÷ 60 = 33.3%. Same sale, same $20, two different percentages.

Why the numbers differ

The selling price is always larger than the cost when you make a profit, so dividing the same profit by the price gives a smaller percentage. Margin is therefore always lower than markup for a profitable sale. Margin can never reach 100%, since the price would have to be all profit, while markup can be any size: a 200% markup is common for some goods.

Converting between them

• Margin = Markup ÷ (1 + Markup)
• Markup = Margin ÷ (1 − Margin)

Markup	Margin
25%	20%
50%	33.3%
66.7%	40%
100%	50%
200%	66.7%

Pricing for a target margin

This is where mixing the two costs real money. Say your cost is $40 and you want a 40% margin. A common mistake is to add 40% to the cost: 40 × 1.40 = $56. But the margin at $56 is only 16 ÷ 56 ≈ 28.6%.

To hit a margin target, divide the cost by (1 − margin):

Price = Cost ÷ (1 − Target margin) = 40 ÷ 0.60 = $66.67

Check: profit = $26.67, and 26.67 ÷ 66.67 = 40%. ✔ The equivalent markup is 66.7%.

To hit a markup target instead, multiply: Price = Cost × (1 + Markup). A 50% markup on $40 gives $60.

Notice the structure: a margin target is a reverse-percentage problem, because the price is the unknown base. The same "divide by (1 − rate)" idea appears in finding the original price before a discount.

Which one should you use?

• Markup is convenient when setting prices from costs, because you start from the number you know.
• Margin is how profitability is usually reported. Financial statements and industry comparisons generally use margins, because they relate profit to revenue (see how to calculate revenue).

What matters most is consistency. If a supplier quotes a "40% margin" and your pricing sheet assumes 40% markup, the gap goes straight out of your profit.

What "cost" includes

For a single product, cost usually means the cost of goods: what you paid for the item, plus shipping to you and any direct production costs. Overheads such as rent and wages are typically not included in per-item markup or gross margin. They show up later in net margin. When you compare figures, check that both use the same definition of cost.

Calculating with CalcTower

• The Markup Calculator takes a cost and a markup percentage and returns the selling price and the resulting margin. $40 at 50% gives a $60 price and a 33.33% margin.
• The Profit Margin Calculator takes revenue (price) and cost and returns the profit, the margin and the equivalent markup. $60 and $40 give a $20 profit, a 33.33% margin and a 50% markup.

For a margin target, use the price formula above, then confirm the result in the Profit Margin Calculator.