Markup is your profit divided by what the item cost you. Margin is your profit divided by the price you sold it for. The profit is the same, only the base changes, so markup is always the bigger number: something that costs you 20 and sells for 50 has a 150% markup but a 60% margin.
If you're trying to work out how to calculate profit margin, here's the short version: take the selling price, subtract what the item cost you, then divide the answer by the selling price. Markup looks up from your cost. Margin looks down from your price. Mix them up and you'll charge less than you think.
The two formulas in plain words
Both start with the same number, your profit on one sale. Where they differ is what you divide it by.
- Profit = selling price minus cost
- Markup % = profit divided by cost, times 100
- Margin % = profit divided by selling price, times 100
By cost I mean the direct cost of the thing you sold: what you paid for the stock, or the materials and packaging that went into making it. Rent, software and your own time don't go in here. Those come out later, further down your accounts. So the margin we're talking about is gross margin, the one you use to set prices.
One product, start to finish
I'm going to use one example all the way through, because it's much easier to see the difference on a real product than in a formula.
Say you make candles. The wax, jar, wick, label and box come to 20 per candle. You sell each one for 50.
- Profit: 50 minus 20 = 30
- Markup: 30 divided by 20 = 1.5, so 150%
- Margin: 30 divided by 50 = 0.6, so 60%
Same candle, same sale, same 30 in your pocket. One way of describing it says 150%, the other says 60%. Neither is wrong. They're answering different questions. Markup tells you how much you added on top of cost. Margin tells you how much of every sale you keep before overheads.
Working forwards from a markup
If you think in markup, the price is your cost times one plus the markup. For the candle, 20 times 2.5 gives you 50. It's quick, and it's how a lot of makers price in their heads.
Working backwards from a margin
If you know the margin you need, divide your cost by one minus that margin. For a 60% margin, that's 20 divided by 0.4, which gives you 50 again. This is the one I'd learn, because it starts from what the business needs to keep, not from a number that sounds generous.
Markup to margin conversion table
Here's how common markups translate into margin. The last column shows what the candle would sell for at each one, so you can see the jump in price.
| Markup | Margin | Candle (cost 20) sells for |
|---|---|---|
| 25% | 20% | 25 |
| 50% | 33.3% | 30 |
| 100% | 50% | 40 |
| 150% | 60% | 50 |
| 200% | 66.7% | 60 |
| 300% | 75% | 80 |
If you want to convert any number yourself, use these:
- Margin = markup divided by (1 + markup)
- Markup = margin divided by (1 - margin)
Write markup and margin as decimals when you do the sums, so 150% becomes 1.5. And notice one thing in the table: markup can climb as high as you like, but margin can never reach 100%, because that would mean the item cost you nothing.
The mistake that loses money
This is the one I see most often with small businesses. You decide you need a 40% margin to cover your overheads and pay yourself. Then you add 40% on top of cost, because that feels like the same thing.
Back to the candle. 20 plus 40% is 28. Your profit is 8. Divide 8 by 28 and your margin is about 28.6%, not 40%. You're short on every sale, and it only shows up months later when the overheads don't get covered.
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To hit a 40% margin, the sum is 20 divided by 0.6, which comes to about 33.33. That's the price you meant to charge. The gap between 28 and 33.33 might not look like much on one candle, but it's there on every single one you sell.
Discounts hurt more than they look
The same maths catches people out on sales. Take the candle at 50 and run 20% off. The price drops to 40. Your cost is still 20, so profit falls from 30 to 20. You've given away a fifth of the price and lost a third of your profit. Before you run a discount, work out the margin at the sale price, not the full price.
Costs you forgot to count
Margin is only as good as the cost you put in. If the candle needs a padded mailer, the card processor takes a cut and the selling platform charges per order, those belong in your cost per item. Leave them out and your margin looks healthier on paper than your bank balance does. Check your providers' current pricing pages and add them in.
Which one to use when
You don't have to pick one forever. Each has a job.
When you're setting prices
Start with the margin you need, then work back to the price. Use markup as a shortcut only once you've converted it, so you know a 100% markup gives you 50% margin and not more. If you sell time rather than products, the same thinking applies, and my guide on how to stop undercharging for your services walks through it. If you'd like help drafting price options, these ChatGPT prompts for pricing are a good place to start.
When you're reporting on the business
Use margin. Your accounts show sales and cost of sales, so gross margin falls straight out of them, and it's the figure your accountant, bank or any investor will expect. Good bookkeeping software for small businesses will calculate it for you each month, which makes it easy to spot when it starts to slip.
When you're talking to wholesalers and retailers
This is where the confusion costs real money. Retailers usually talk about the margin they need on your product. Some trades talk in markup instead, and you'll hear "keystone" in retail, which means doubling the cost, a 100% markup or a 50% margin. Whenever someone quotes you a percentage, ask one question: is that markup or margin? Then get the answer in writing before you agree terms.
A quick check before you change your prices
- Add up every direct cost per item, including packaging and per-order charges
- Decide the margin you need, not the markup
- Divide cost by one minus that margin to get your price
- Check the margin again at any sale or wholesale price you plan to offer
- Ask your accountant to sense-check the numbers if you're unsure
Frequently asked questions
Is a 50% markup the same as a 50% margin?
No. A 50% markup gives you a 33.3% margin. To get a 50% margin, you need a 100% markup, which means doubling your cost.
How do I calculate profit margin?
Subtract your cost from the selling price to get your profit, then divide that profit by the selling price and multiply by 100. Something that costs 20 and sells for 50 has a 60% margin.
Can profit margin be more than 100%?
No. Margin is a share of the selling price, so it can't go above 100%. Markup can, because it's measured against cost, and a 300% markup is only a 75% margin.
Should I use gross margin or net margin?
Use gross margin to price a product, because it only looks at direct costs. Use net margin to see whether the whole business makes money after overheads. Your accountant can help you track both.
