Markup vs margin: the difference, with formulas and examples

What is the difference between markup and margin?

Markup and margin both describe the same profit, measured against different numbers. Markup compares profit with what you paid; margin compares profit with what the customer paid.

Take one item. You buy it for 60 and sell it for 100. Your profit on it is 40.

• Markup is 40 ÷ 60 = 66.7%. You added two thirds on top of cost.
• Margin is 40 ÷ 100 = 40%. You keep 40 out of every 100 you take.

Same item, same profit, two different percentages. Because the selling price is always bigger than the cost, the margin is always the smaller figure. That is where the trouble starts, because people say "I work on 40%" without saying which one.

What are the markup and margin formulas?

There are four formulas worth knowing. Two measure the profit, two turn a percentage into a price.

And two to convert one percentage into the other:

Use the percentages as decimals in the formulas: 40% is 0.40, 25% is 0.25.

Worked example: pricing to a 35% margin

A product costs 26. You want a 35% margin.

Price = 26 ÷ (1 − 0.35) = 26 ÷ 0.65 = 40.00

Check: profit is 40 − 26 = 14, and 14 ÷ 40 = 0.35, so the margin is 35%. The markup on the same item is 14 ÷ 26 = 53.8%.

You can run any of these in the markup and margin calculator.

How do you convert markup to margin?

Divide the markup by one plus the markup. The table below covers the figures shops use most.

Two rows are worth remembering. A 100% markup is a 50% margin: double the cost and you keep half the price. That is what retailers call keystone pricing. And a 25% margin needs a 33.3% markup, which surprises a lot of wholesalers who add 25% and think they are making 25%.

What is the most common markup and margin mistake?

Adding your target margin to the cost as if it were a markup. You set out to make 40% and end up making 28.6%, on every line, without noticing until the year-end accounts.

Worked example: the cost of mixing them up

A wholesaler wants a 40% margin. The buyer prices a product that costs 60 by adding 40%:

• Price charged: 60 × 1.40 = 84
• Profit per unit: 84 − 60 = 24
• Actual margin: 24 ÷ 84 = 28.6%

What the price should have been:

• Price for a 40% margin: 60 ÷ 0.60 = 100
• Profit per unit: 40

On 1,000 units, the mistake costs 16,000 of gross profit. That assumes the same number of units sell at both prices, which is not always true; the higher price might sell fewer. But it shows the size of the gap. If the business needs a 40% margin to cover rent, wages and running costs, a 28.6% margin can turn a profitable year into a loss.

The fix is simple: agree as a business that targets are always margins, and that prices are always worked out by dividing, not multiplying.

The same mistake with discounts

The mirror-image mistake happens with discounts. Taking 10% off a price does not take 10% off your profit; it takes much more. On the item that costs 60 and sells for 100, a 10% discount brings the price to 90 and the profit from 40 to 30. That is a quarter of your profit gone. Our guide on how to price products shows how many extra sales a discount needs to break even.

Should margin be worked out with or without VAT?

Without. Work out both the cost and the selling price excluding VAT, because the VAT you collect is not yours to keep.

Worked example: the VAT trap

Say your sales VAT rate is 20%. A product costs 60 excluding VAT and sells on the shelf for 120 including VAT.

• Selling price excluding VAT: 120 ÷ 1.20 = 100
• Real margin: (100 − 60) ÷ 100 = 40%

If you forget to take the VAT out, you calculate (120 − 60) ÷ 120 = 50%. That looks ten points better than reality, and any discount decisions based on it will be wrong.

Two points to check with your own situation:

• If you are VAT-registered, you normally reclaim the VAT on your purchases, so use costs excluding VAT.
• If you are not VAT-registered, you cannot reclaim the VAT you pay to suppliers. It is part of your cost, so use costs including VAT. Your selling price has no VAT in it, so use it as it is.

Rates and rules differ by country and by product, so use the rates that apply to you, and check them with your tax authority or accountant.

How do you use markup and margin day to day?

Set targets and read reports in margin; use markup only as a quick tool at the counter, with a conversion table taped up next to it.

A practical routine:

1. Set a target margin per category, not one figure for the whole shop. Cleaning products, phone accessories and fresh food rarely earn the same.
2. Price new lines by dividing cost by (1 − target margin), then round to a sensible price point.
3. Recheck when costs change. If a supplier puts the cost up from 60 to 66 and you keep the price at 100, your margin falls from 40% to 34%.
4. Watch actual margin, not intended margin. Discounts, price overrides and wrong costs mean the margin you planned is rarely the one you get.
5. Look at profit in money as well as percentage. A 15% margin on a line you sell 500 of a week can earn more than a 60% margin on something you sell twice a month.

Worked example: when a cost rise eats the margin

To get back to 40%, the new price is 66 ÷ 0.60 = 110. Note that the price has to rise by 10, while the cost rose by only 6. Keeping the same margin on a higher cost means a bigger profit per unit in money, which is fair: you have more cash tied up in each one.

How do markup and margin relate to stock value?

Your stock value at cost and at selling price follow the same arithmetic. If your shelves hold 30,000 of stock at cost and 50,000 at selling price excluding VAT, the gross profit waiting on the shelves is 20,000, a 40% margin on the stock as a whole. Our guide to stock valuation explains how to measure the cost side properly.