The difference between margin and markup
Margin is profit as a percentage of the selling price; markup is profit as a percentage of the cost.[1] Both start from the same dollar profit, which is why they are so easy to confuse.
| Margin | Markup | |
|---|---|---|
| Formula | (Price − Cost) ÷ Price | (Price − Cost) ÷ Cost |
| Base | Selling price (revenue) | Cost |
| $60 cost, $100 price | $40 ÷ $100 = 40% | $40 ÷ $60 = 66.7% |
| Range | Below 100% for any item with a cost | No upper limit |
| Who uses it | Accountants, financial statements, investors | Buyers, retailers setting prices from cost |
Because the price is always larger than the cost on a profitable sale, margin is always the smaller of the two numbers. Financial statements report gross margin against net sales, so a company's published margin is a margin, never a markup.[2]
Converting markup to margin and margin to markup
To turn a margin into a markup, divide the margin by one minus the margin; to turn a markup into a margin, divide the markup by one plus the markup.
Margin to markup chart
The chart reads both ways: find the margin you want and price with the matching markup.
| Margin | Markup needed |
|---|---|
| 5% | 5.3% |
| 10% | 11.1% |
| 15% | 17.6% |
| 20% | 25.0% |
| 25% | 33.3% |
| 30% | 42.9% |
| 35% | 53.8% |
| 40% | 66.7% |
| 45% | 81.8% |
| 50% | 100.0% |
| 55% | 122.2% |
| 60% | 150.0% |
| 65% | 185.7% |
| 70% | 233.3% |
| 75% | 300.0% |
| 80% | 400.0% |
| Markup | Resulting margin |
|---|---|
| 10% | 9.1% |
| 20% | 16.7% |
| 25% | 20.0% |
| 30% | 23.1% |
| 40% | 28.6% |
| 50% | 33.3% |
| 60% | 37.5% |
| 75% | 42.9% |
| 100% | 50.0% |
| 150% | 60.0% |
| 200% | 66.7% |
The pricing mistake this causes
The most common error is pricing with a markup while believing it is a margin. A shop owner who wants a 40% margin and adds 40% to a $60 cost charges $84. The profit is $24, which is a 28.6% margin, not 40%. Over a year of sales, the gap between the margin the owner planned and the margin actually earned can be the whole of the profit.
Rule of thumbIf a target is written as a margin, divide the cost by (1 − margin). If it is written as a markup, multiply the cost by (1 + markup). Never add a margin percentage to cost.
The reverse error happens with discounts. A 50% markup ($60 to $90) does not survive a 50% off sale: half of $90 is $45, a loss of $15 on a $60 item. A markdown is a percentage of the price, so compare it with the margin (33.3% here), not the markup.
Which one should you use?
Use whichever your plan is written in, and say which one you mean. Markup is convenient at the counter, because you start from a supplier's invoice. Margin is convenient for planning, because it adds up the same way your income statement does: a 40% gross margin on $250,000 of sales is $100,000 of gross profit to pay rent, wages and everything else. Retail gross margins published by the U.S. Census Bureau are margins on sales, so to compare your pricing with them, convert your markup first.[3]
- To find a price from a cost and a target margin, use the margin calculator.
- To add a markup to a cost, or find the markup between two prices, use the markup calculator.
- To see both for one sale, enter a price and cost in the profit margin calculator.
- To build platform fees into a margin-based price, use the selling price calculator.
Worked examples
- Retail: a $12 wholesale candle priced at $30. Markup = $18 ÷ $12 = 150%. Margin = $18 ÷ $30 = 60%.
- Target margin: a $45 jacket needs a 55% margin. Price = $45 ÷ 0.45 = $100. Markup = $55 ÷ $45 = 122%.
- Fixed retail price: a book has a $24.99 cover price and the store needs a 40% margin. Most it can pay = $24.99 × 0.60 = $14.99.
- Keystone: doubling a $15 cost to $30 is a 100% markup and a 50% margin.
Frequently asked questions
What is the difference between margin and markup?
Margin is profit divided by the selling price. Markup is profit divided by the cost. For a $60 item sold at $100, margin is 40% and markup is 66.7%.
How do I convert markup to margin?
Divide the markup by one plus the markup. A 25% markup is 0.25 ÷ 1.25 = 20% margin.
How do I convert margin to markup?
Divide the margin by one minus the margin. A 30% margin is 0.30 ÷ 0.70 = 42.9% markup.
Is a 50% markup the same as a 50% margin?
No. A 50% markup gives a 33.3% margin. A 50% margin needs a 100% markup.
Why is markup always higher than margin?
Both divide the same profit, but markup divides by the cost, which is smaller than the price whenever the sale is profitable.
Sources
- Principles of Marketing, 18.3 Retailing Strategy Decisions (markup and gross margin)
- Principles of Accounting, Volume 1: Financial Accounting, Chapter 6 key terms (gross margin, gross profit margin ratio)
- Annual Retail Trade Survey: 2022 (benchmarked), gross margin as a percentage of sales by kind of business