Profit margin vs markup: the difference that costs businesses money

Margin and markup both describe profit, but against different bases. Mixing them up is one of the most common pricing mistakes in small businesses: a "30% markup" earns noticeably less than a "30% margin".

The formulas

• Profit = selling price − cost
• Margin = profit ÷ selling price × 100
• Markup = profit ÷ cost × 100

Example: you buy at 75 and sell at 100. Profit = 25. Margin = 25 ÷ 100 = 25%. Markup = 25 ÷ 75 = 33.33%.

Pricing for a target margin

Price = cost ÷ (1 − margin). For a 30% margin on an item costing 70: 70 ÷ 0.70 = 100.

A common error is to add 30% to the cost (70 × 1.3 = 91). That gives a 30% markup but only a 23% margin.

Quick conversion

• Markup = margin ÷ (1 − margin). A 25% margin is a 33.33% markup.
• Margin = markup ÷ (1 + markup). A 50% markup is a 33.33% margin.

Which should you use?

Margin tells you how much of every sale you keep, which is the better number for comparing products and planning. Markup is handy when setting prices from costs. Just be clear which one you mean, especially when you talk to suppliers, staff or investors.

Try it: the free profit margin calculator shows profit, margin and markup together, or the price you need for a target margin.

Worked example: a small wholesaler

Suppose you buy a case of goods for $50 and want a 20% margin. Price = $50 ÷ 0.80 = $62.50. Your profit is $12.50, which is 20% of the selling price, but a 25% markup on cost. If you had simply added 20% to the cost, you would charge $60 and keep only a 16.7% margin, giving away $2.50 on every case.

Don't forget discounts and costs you can't see

Margins shrink quickly when you give discounts. A 10% discount on a product with a 25% margin cuts your profit per sale by 40% (from 25 to 15 on a price of 100). Also count delivery, packaging, payment fees and returns in your cost, or your "margin" will look better than it really is.

Common mistakes

• Quoting a markup percentage when your customer or partner means margin.
• Calculating margin on the price including sales tax. Work on prices before tax.
• Comparing products by profit per item instead of total profit, which ignores how many you sell.