Profit Margin vs Markup: What’s the Difference?
Short answer
Margin is profit as a percentage of the selling price; markup is profit as a percentage of the cost. An item that costs $60 and sells for $100 has a $40 profit, a 40% margin (40 ÷ 100) and a 66.7% markup (40 ÷ 60). Mixing them up leads to prices that are too low.
Shop owners, freelancers and students in business classes all run into the same confusion: someone says “we work on a 40% margin” and someone else hears “40% markup”. The two numbers come from the same cost and price, but they are divided by different things, so they are never equal. This guide explains each one in plain language, shows how to convert between them, and how to set a price that hits the margin you want.
The three numbers you need
- Cost: what the item costs you to buy or make.
- Price: what the customer pays (before sales tax, which you can work out separately with the sales tax calculator).
- Profit: price minus cost. This is gross profit; it ignores overheads such as rent and wages.
Margin: profit compared with price
margin = profit ÷ price × 100
Margin answers the question: “Of every dollar a customer pays, how much do I keep as gross profit?” With a cost of $60 and a price of $100, the profit is $40 and the margin is 40 ÷ 100 = 40%. Margin can never reach 100%, because that would require a cost of zero.
Markup: profit compared with cost
markup = profit ÷ cost × 100
Markup answers: “How much did I add on top of my cost?” With the same numbers, the markup is 40 ÷ 60 = 66.7%. Markup has no upper limit; doubling the cost is a 100% markup, tripling it is 200%.
Side-by-side comparison
| Cost | Price | Profit | Margin | Markup |
|---|---|---|---|---|
| $80 | $100 | $20 | 20% | 25% |
| $75 | $100 | $25 | 25% | 33.3% |
| $60 | $100 | $40 | 40% | 66.7% |
| $50 | $100 | $50 | 50% | 100% |
Notice the pattern: markup is always the larger number, and the gap grows as profit grows.
How to price for a target margin
This is where most pricing mistakes happen. Suppose an item costs $70 and you want a 30% margin. Adding 30% to the cost gives 70 × 1.30 = $91, but the margin on $91 is only 21 ÷ 91 ≈ 23%. To hit a true 30% margin, divide the cost by 1 minus the margin:
price = cost ÷ (1 − margin)
70 ÷ (1 − 0.30) = 70 ÷ 0.70 = $100. Check: profit is $30 and 30 ÷ 100 = 30%. Our profit margin calculator has a mode for exactly this: enter the cost and the margin you want, and it gives the price.
How to price for a target markup
Markup pricing is simpler: price = cost × (1 + markup). A 30% markup on $70 is 70 × 1.30 = $91. Many retailers use a standard markup because it is easy to apply to every item; just remember it produces a smaller margin.
Converting between margin and markup
- Margin to markup: markup = margin ÷ (1 − margin). A 40% margin is 0.40 ÷ 0.60 = 66.7% markup.
- Markup to margin: margin = markup ÷ (1 + markup). A 25% markup is 0.25 ÷ 1.25 = 20% margin.
These are just percentages of different bases. If percentages in general feel tricky, our guide to percentage increase explains why the base matters.
Which one should you use?
- Use margin for financial reports, comparing products and judging profitability. Accountants and investors usually talk in margins because they relate profit to revenue.
- Use markup when setting prices quickly from cost, especially if you have many items.
- Always say which one you mean. Write “40% margin” or “40% markup” in quotes and price lists.
Gross margin is not the whole story
The figures here are gross margins: price minus the direct cost of the item. To stay in business, gross profit also has to cover rent, wages, software, shipping, payment fees and marketing. Net margin, profit after all costs, is usually much lower. When you set prices, start from a gross margin that leaves room for those costs, and remember that sales tax collected from customers is not your revenue. See how to calculate sales tax for adding and removing tax correctly.
Example: pricing for a small online shop
Say you sell handmade candles. Wax, wicks, jars and labels cost $6 per candle, and you want a 60% gross margin to cover platform fees, packaging and your time. The price is 6 ÷ (1 − 0.60) = 6 ÷ 0.40 = $15. Your profit per candle is $9, which is a 60% margin but a 150% markup. If a supplier raises your cost to $7, keeping the same margin means a price of 7 ÷ 0.40 = $17.50, not $16. Small cost changes need bigger price changes than you might expect.
Quick checklist
- Write down the cost and price.
- Profit = price − cost.
- Margin = profit ÷ price; markup = profit ÷ cost.
- For a target margin, price = cost ÷ (1 − margin).
- Double-check with the calculator or the percentage calculator.
Frequently asked questions
Is a 50% markup the same as a 50% margin?
No. A 50% markup on a $100 cost gives a $150 price and a margin of about 33%. A 50% margin requires a price of $200 on a $100 cost, which is a 100% markup.
How do I calculate the selling price from cost and margin?
Divide the cost by 1 minus the margin as a decimal. For a $70 cost and a 30% margin, 70 ÷ 0.70 = $100.
Can profit margin be more than 100%?
No. Margin is profit divided by price, and profit can never exceed the price. Markup, however, can be more than 100%.
What is a good profit margin?
It depends heavily on the industry, from thin margins in groceries to high margins in software. Compare with businesses like yours and make sure gross profit covers all your overheads.
Do I include sales tax when calculating margin?
No. Use the price before tax, because the tax you collect is passed on to the government and is not part of your revenue.