A shopkeeper buys a shirt for 80 and sells it for 100. Is the profit 20 percent or 25 percent? Both answers are correct, and that is exactly the problem. One number is called the markup and the other is called the margin, and mixing them up is one of the most common and most expensive pricing mistakes in small business. A seller who wants a 30 percent margin but adds a 30 percent markup ends up earning noticeably less than planned, and the gap grows as prices rise. This guide explains both terms in plain language, gives you the formulas, shows how to convert from one to the other and walks through full worked examples, including the effect of discounts and taxes.
It is written for shop owners, online sellers, freelancers who sell products, students of business and anyone who has to set a price. You can follow every calculation with the Markup Calculator and the Profit Margin Calculator.
Definitions: cost, price, profit, markup and margin
Start with four simple terms. The cost is what it costs you to buy or make one unit. The selling price is what the customer pays, before any tax that you collect for the government. The profit is the selling price minus the cost. Then there are two ways to express the profit as a percentage, and the only difference between them is the number that you divide by.
- Markup is profit as a percentage of the cost. It tells you how much you add on top of what you paid.
- Margin (gross margin or profit margin) is profit as a percentage of the selling price. It tells you how much of each unit of sales you keep as profit.
Because the selling price is larger than the cost, the margin percentage is always smaller than the markup percentage for the same item. A margin can never reach 100 percent, but a markup can be 100 percent, 200 percent or more.
The formulas
Profit = Selling price − Cost
Markup % = Profit ÷ Cost × 100
Margin % = Profit ÷ Selling price × 100
To go the other way, when you know the cost and want to find the price:
Price from markup = Cost × (1 + Markup %/100)
Price from margin = Cost ÷ (1 − Margin %/100)
And to convert one percentage to the other:
Margin = Markup ÷ (1 + Markup) and Markup = Margin ÷ (1 − Margin), where the percentages are written as decimals, for example 25 percent as 0.25.
Worked example: the shirt
The shirt costs 80 and sells for 100. The profit is 100 − 80 = 20.
- Markup = 20 ÷ 80 = 0.25, which is 25 percent.
- Margin = 20 ÷ 100 = 0.20, which is 20 percent.
The same profit of 20 produces two different percentages, because the markup compares it with 80 and the margin compares it with 100. If a supplier says that they work on a 25 percent markup and a customer says that they expect a 25 percent margin, they are describing different prices. A 25 percent markup on a cost of 80 gives a price of 100, but a 25 percent margin on a cost of 80 gives a price of 80 ÷ 0.75, which is 106.67.
A conversion table you can use every day
The table shows the margin that results from common markups.
| Markup on cost | Margin on price |
|---|---|
| 10% | 9.09% |
| 20% | 16.67% |
| 25% | 20% |
| 30% | 23.08% |
| 50% | 33.33% |
| 75% | 42.86% |
| 100% | 50% |
| 200% | 66.67% |
Notice that a markup of 100 percent, which means doubling the cost, gives a margin of only 50 percent. A markup of 50 percent gives a margin of one third. The difference between the two numbers widens as the percentage grows.
How to price for a target margin
Suppose that your goal is a 30 percent margin and your cost is 70 per unit. The correct method divides the cost by one minus the margin: 70 ÷ (1 − 0.30) = 70 ÷ 0.70 = 100. The profit is 30, which is exactly 30 percent of the price of 100.
Now see what happens if you use the mistaken method and add 30 percent to the cost: 70 × 1.30 = 91. The profit is 21, and 21 ÷ 91 is 23.08 percent. You wanted 30 percent but you earn only 23 percent, which is 9 less on every 100 of sales. Over a month with 400,000 in sales, the missing 6.92 points of margin cost about 27,700 in profit. The mistake is easy to make and invisible until the accounts are done, so decide whether your target is a markup or a margin before you set prices, and write it on your price list.
How discounts reduce profit faster than you expect
Discounts are applied to the selling price, so they cut directly into the margin. Take an item with a cost of 60 and a price of 100. The profit is 40 and the margin is 40 percent. Offer a 20 percent discount and the new price is 80. The cost is still 60, so the profit falls to 20, which is half of the original profit, and the margin falls to 25 percent. A discount of one fifth of the price removes half of the profit.
That has a consequence for sales volume. To earn the same total profit after the discount, you would need to sell twice as many units, because each unit now earns 20 instead of 40. If the discount does not double your sales, you are worse off than before. Use the Discount Calculator to test the sale price, and compare the new margin with your target before you launch a promotion.
Taxes, fees and other costs that distort the picture
The formulas above use the price before tax. If you collect VAT or sales tax, calculate your margin on the price excluding tax, because the tax belongs to the government. For example, if a customer pays 118 including 18 percent tax, the price before tax is 100, and that is the number to use. The VAT Calculator adds or removes tax in seconds.
The cost should include more than the supplier’s invoice. Add delivery to your shop, import duties, packaging, payment processing fees, marketplace commissions and returns. An online seller who pays a platform commission of 10 percent and a payment fee of 2 percent has already lost 12 percent of the price before counting the product cost. For a price of 100 and a cost of 70, the true profit is not 30 but 18. Always work out your margin after these deductions, and distinguish between the gross margin, which looks only at the cost of goods, and the net margin, which also subtracts rent, wages, advertising and other overheads.
Break-even and the minimum margin you need
A product can have a good margin and still lose money if the volume is too low to cover fixed costs. The break-even point is the number of units at which total profit equals total fixed costs. It is the fixed costs divided by the profit per unit. If you pay 30,000 per month in rent and wages and each unit earns 30, you need 1,000 units a month just to break even. A higher margin lowers that number, and a discount raises it. The Break-Even Calculator shows the volume and the sales amount needed, so you can set a minimum margin that keeps the business safe.
Which should you use: markup or margin?
Neither is better in general. They answer different questions. Markup is convenient when you set prices from costs, for example in a shop that adds a standard percentage to every item. Margin is more useful for judging the health of the business and for comparing products, because it shows how much of each sale remains as profit and it is the figure that appears in accounts and financial statements. A practical approach is to price with a margin target, convert it to a markup when your team needs a simple multiplier, and always state clearly which one you mean in contracts, price lists and discussions with partners.
Common mistakes
The first mistake is to treat the two terms as synonyms, as in the 30 percent example above. The second is to calculate a margin on the cost instead of the price. The third is to forget transport, fees and returns in the cost. The fourth is to apply a discount without checking the new margin. The fifth is to include tax in the price when calculating the margin. The sixth is to round too early, which matters when you sell thousands of units. The seventh is to confuse a percentage increase in price with a percentage point increase in margin. The Percentage Calculator helps you check each step.
Frequently asked questions
What is the difference between markup and margin?
Markup is profit divided by cost. Margin is profit divided by the selling price. For the same sale the margin percentage is always lower than the markup percentage.
If I add 30 percent markup, what is my margin?
A 30 percent markup gives a margin of 30 ÷ 130, which is about 23.08 percent.
How do I get a 40 percent margin?
Divide the cost by 0.60. For example, a cost of 60 needs a price of 100 for a 40 percent margin.
Is a 50 percent markup the same as a 50 percent margin?
No. A 50 percent markup is a margin of 33.33 percent. A 50 percent margin needs a markup of 100 percent.
Should I calculate margin before or after tax?
Use the price before VAT or sales tax, because the tax is collected for the government and is not part of your income.
Can a margin be more than 100 percent?
No. The profit cannot be larger than the selling price, so a margin is always below 100 percent. A markup can exceed 100 percent.
Related tools
- Markup Calculator – Calculate markup percentage from cost and selling price.
- Profit Margin Calculator – Calculate gross profit and profit margin percentage from revenue and cost.
- Discount Calculator – Calculate sale price and money saved from a discount.
- Break-Even Calculator – Estimate the number of units needed to cover fixed and variable costs.
- VAT Calculator – Add tax to a net amount or extract tax from a gross total.
- Percentage Calculator – Find a percentage of any number instantly.
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This guide is for general information and education. Figures in examples are illustrations, not current prices or advice. Please read our Disclaimer, and confirm important decisions with a qualified professional or an official source.