What is 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. A product that costs $60 and sells for $100 makes $40 profit: a 40% margin ($40 ÷ $100) and a 66.7% markup ($40 ÷ $60). Because price is always higher than cost, markup is always the larger percentage.
Margin and markup formulas
| What you want | Formula | Spreadsheet formula |
|---|---|---|
| Gross margin % | (Price − Cost) ÷ Price | =(B2-A2)/B2 |
| Markup % | (Price − Cost) ÷ Cost | =(B2-A2)/A2 |
| Price for a target margin | Cost ÷ (1 − Margin) | =A2/(1-C2) |
| Price for a target markup | Cost × (1 + Markup) | =A2*(1+C2) |
| Convert margin to markup | Margin ÷ (1 − Margin) | =C2/(1-C2) |
| Convert markup to margin | Markup ÷ (1 + Markup) | =C2/(1+C2) |
Formulas and spreadsheet versions (cost in A2, price in B2, target % in C2)
Margin to markup conversion chart
| Gross margin | Equivalent markup | Price for a $100 cost |
|---|---|---|
| 10% | 11.1% | $111.11 |
| 20% | 25.0% | $125.00 |
| 25% | 33.3% | $133.33 |
| 30% | 42.9% | $142.86 |
| 33.3% | 50.0% | $150.00 |
| 40% | 66.7% | $166.67 |
| 50% | 100.0% | $200.00 |
| 60% | 150.0% | $250.00 |
Equivalent margin and markup percentages
Keystone pricing
A 100% markup, doubling the cost, is called keystone pricing in retail. It always produces a 50% margin.
The most common pricing mistake
Told to achieve a 40% margin, many people add 40% to cost. On a $60 cost that gives a price of $84. Profit is $24, and $24 ÷ $84 is a margin of 28.6%, well short of the target. The correct price is $60 ÷ (1 − 0.40) = $100.
Small gaps add up across every sale
On $1,000,000 of sales, the difference between a 40% target margin and the 28.6% achieved is roughly $114,000 of gross profit. Check how your price lists and quote templates calculate prices, especially any built in a spreadsheet.
How does a discount affect your margin?
A discount comes straight out of profit, not out of cost, so its effect on margin is larger than the headline percentage suggests. Take the same product: $100 price, $60 cost, $40 gross profit.
| Discount | New price | Profit per unit | Profit lost | Extra sales needed to break even |
|---|---|---|---|---|
| 5% | $95 | $35 | 12.5% | +14.3% |
| 10% | $90 | $30 | 25.0% | +33.3% |
| 15% | $85 | $25 | 37.5% | +60.0% |
| 20% | $80 | $20 | 50.0% | +100.0% |
Effect of a discount on a product with a 40% margin
A 20% promotion on this product only breaks even if it doubles unit sales. Before approving a discount, work out the extra volume it needs and ask whether that is realistic.
Should you use margin or markup?
When each is useful
Use margin for
- Setting profitability targets
- Reading your P&L (gross margin)
- Comparing products, channels and periods
- Conversations with lenders and investors
Use markup for
- Quick cost-plus pricing at the counter
- Supplier price lists quoted on cost
- Contracts priced as cost plus a percentage
- Turning a margin target into a pricing rule
Which cost should you use?
Both calculations are only as good as the cost behind them. Include everything it takes to get the product to the point of sale: purchase price, inbound freight, duties and, for manufactured goods, direct materials and labour. If your inventory costing method is FIFO or weighted average, your recorded cost of goods sold moves as supplier prices change, so review prices whenever input costs rise.
What is the difference between margin and markup?
Margin is profit divided by the selling price. Markup is profit divided by the cost. The same sale always has a higher markup percentage than margin percentage.
What markup gives a 50% margin?
A 100% markup. Doubling the cost gives a price where half is cost and half is profit.
What markup gives a 30% margin?
About 42.9%. Use markup = margin ÷ (1 − margin): 0.30 ÷ 0.70 = 0.4286.
How do I calculate selling price from a target margin?
Divide cost by one minus the target margin. For a $60 cost and a 40% margin: $60 ÷ 0.60 = $100.
Can margin be more than 100%?
No. Margin is a share of the selling price, so it cannot exceed 100%. Markup has no upper limit.
Is gross margin the same as profit margin?
Gross margin deducts only the direct cost of goods sold. Net profit margin also deducts overheads, interest and tax, so it is lower for a profitable business.
Set targets in margin, price in markup, and always know which one you are looking at.
Resources
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