Margin vs markup: what is the difference?
An item that costs you £10 and sells for £15 carries a 50% markup and a 33.3% margin. Both numbers describe the same £5 of profit; they differ only in what they divide it by — markup divides by the cost, margin divides by the price. That sounds like pedantry until somebody who wants a 40% margin adds 40% to their cost, ships the order and keeps 28.6%. This page gives both formulas, the conversion in each direction, and the arithmetic for pricing from a margin you have actually chosen.
Two formulas, one profit, two different numbers
Gross profit is the easy part and nobody argues about it: what the customer paid, minus what the item cost you.
Gross profit = price − cost
Margin and markup are both that same gross profit expressed as a percentage. The only difference is the denominator.
Markup % = (price − cost) ÷ cost × 100
Margin % = (price − cost) ÷ price × 100
Because the price is always larger than the cost on anything you sell at a profit, the margin percentage is always the smaller of the two. Take the £10 item sold at £15:
| Line | Working | Result |
|---|---|---|
| Cost | £10.00 | |
| Price | £15.00 | |
| Gross profit | £15.00 − £10.00 | £5.00 |
| Markup | £5.00 ÷ £10.00 | 50.0% |
| Margin | £5.00 ÷ £15.00 | 33.3% |
Neither number is more correct than the other. They answer different questions. Markup answers “how much did I add on top of what I paid?” and it is the natural language of buying: you are standing in front of a supplier invoice. Margin answers “what share of the money the customer handed over did I keep?” and it is the natural language of selling: you are standing in front of a sales report. A spreadsheet of supplier costs tends to be written in markup; a profit and loss statement is always written in margin.
The trouble starts when the two conversations meet, because the words get used as though they were interchangeable and the numbers are not.
The mistake: adding the margin you wanted as a markup
This is the single most expensive arithmetic error in small-scale retail, and it is entirely invisible until the year-end accounts arrive.
Say an item costs you £12 and you have decided you need a 40% margin. The instinct is to multiply by 1.40:
£12.00 × 1.40 = £16.80
That is a 40% markup, not a 40% margin. Check what it actually leaves:
| Line | Working | Result |
|---|---|---|
| Price charged | £12.00 × 1.40 | £16.80 |
| Gross profit | £16.80 − £12.00 | £4.80 |
| Margin achieved | £4.80 ÷ £16.80 | 28.6% |
You wanted 40% and you have 28.6%. The correct price for a genuine 40% margin is £20.00, which is worked in full two sections down. The gap is £3.20 on every single unit.
Scale that the way it actually scales. At 1,000 units a year:
| Priced at £16.80 | Priced at £20.00 | |
|---|---|---|
| Revenue on 1,000 units | £16,800 | £20,000 |
| Cost of goods | £12,000 | £12,000 |
| Gross profit | £4,800 | £8,000 |
£3,200 of gross profit a year, from one mis-applied percentage on one product. Nothing about the business changed — not the product, not the supplier, not the number of orders. Only the denominator did.
What makes this error so durable is that the business does not feel broken. Stock moves, orders ship, the bank balance goes up and down in a familiar way. The shortfall only shows up as a vague sense that the volume is not converting into money, which is usually blamed on overheads.
Converting between the two
Both conversions are one line each, and they are worth committing to memory because they turn a supplier conversation into a sales conversation without a spreadsheet.
Margin = markup ÷ (1 + markup)
Markup = margin ÷ (1 − margin)
Work both on the 50% markup from the first section. Margin = 0.50 ÷ 1.50 = 0.3333, so 33.3%. And back again: markup = 0.3333 ÷ 0.6667 = 0.50, so 50%. The full conversion, across the range most physical products actually live in:
| Markup | Equivalent margin | Margin | Equivalent markup |
|---|---|---|---|
| 10% | 9.1% | 10% | 11.1% |
| 20% | 16.7% | 20% | 25.0% |
| 25% | 20.0% | 25% | 33.3% |
| 50% | 33.3% | 30% | 42.9% |
| 66.7% | 40.0% | 40% | 66.7% |
| 100% | 50.0% | 50% | 100.0% |
| 150% | 60.0% | 60% | 150.0% |
| 200% | 66.7% | 70% | 233.3% |
The row worth memorising is the middle one. Doubling the cost is a 100% markup and a 50% margin. That is the old keystone rule, and it is the anchor everything else hangs off: if you are below double cost you are below a 50% margin, and if somebody quotes you a margin above 50% they are asking for more than double.
Read the two halves of the table against each other and the asymmetry is obvious. Markups and margins are close at the bottom — a 10% markup is a 9.1% margin, near enough the same conversation — and they separate violently at the top, where a 70% margin needs a 233% markup. That is why the error in the previous section is mild on low-margin goods and severe on high-margin ones.
Pricing from a target margin: divide, never multiply
If you have chosen a margin, the price comes from a division, not a multiplication. This is the formula that prevents the £3,200 mistake:
Price = cost ÷ (1 − target margin)
The £12 item at a genuine 40% margin: £12.00 ÷ (1 − 0.40) = £12.00 ÷ 0.60 = £20.00. Check it: profit is £8.00, and £8.00 ÷ £20.00 = 40%. Correct.
Run the same £12 cost across a range of target margins, and note how fast the required price climbs once you pass half:
| Target margin | Divide cost by | Price needed | Gross profit |
|---|---|---|---|
| 20% | 0.80 | £15.00 | £3.00 |
| 30% | 0.70 | £17.14 | £5.14 |
| 40% | 0.60 | £20.00 | £8.00 |
| 50% | 0.50 | £24.00 | £12.00 |
| 60% | 0.40 | £30.00 | £18.00 |
| 70% | 0.30 | £40.00 | £28.00 |
One warning about the word “cost” in that formula, because it is where the second big error lives. If “cost” means only what you paid the supplier, the margin you calculate is not the margin you keep. On anything sold online there is packaging, postage, and whatever the platform deducts from the order, and those are costs of the sale as surely as the item is. A £12 item with £1.40 of packaging and postage and £2.10 of platform fees has a real cost of £15.50, and a 40% margin on that needs £15.50 ÷ 0.60 = £25.83, not £20.00.
What each platform actually deducts is worked line by line in the guides for Etsy, eBay, Shopify and Amazon FBA. The fuller version of this calculation, which starts from what you want to keep and works backwards through every deduction, is in how to price a product.
Where the gap gets dangerous
The distance between a markup and its margin is not constant. It widens as the numbers rise, which is why the mistake is survivable on groceries and fatal on jewellery.
| Markup applied | Margin you believed | Margin you got | Shortfall |
|---|---|---|---|
| 10% | 10% | 9.1% | 0.9 points |
| 25% | 25% | 20.0% | 5.0 points |
| 40% | 40% | 28.6% | 11.4 points |
| 50% | 50% | 33.3% | 16.7 points |
| 60% | 60% | 37.5% | 22.5 points |
At the top of that table you are keeping barely more than half the margin you thought you had. A maker who believes they run at 60% and actually runs at 37.5% has built every other decision — what to spend on advertising, what to pay themselves, whether to take on a bigger order — on a number that was never true.
Three places the confusion hides
- Wholesale conversations. A buyer asking for “40 points” means margin; a supplier quoting “40 on cost” means markup. Same two words, thirty per cent apart in money. If a wholesale price is the question, the wholesale pricing guide works the whole ladder from cost to retail.
- Discounting. A discount is taken off the price, so it comes straight out of margin at full weight. Take 20% off that £20.00 item and you charge £16.00, keeping £4.00 on a £12.00 cost: the margin falls from 40% to 25%, and the gross profit halves. A fifth off the price was half the profit.
- Spreadsheets inherited from somebody else. A column headed “margin” that divides by the cost is a markup column with the wrong label, and it will misprice every product in the file. Check one row by hand before you trust the rest.
The habit that fixes all three is to stop saying the percentage and start saying the money. “Forty per cent” is ambiguous. “Eight pounds on a twenty pound item” cannot be misread by anyone.
What margin and markup cannot tell you
Both numbers are gross measures on a single unit. They are the right place to start and the wrong place to stop, and the gap between them and an actual profit is where most of the year goes.
- They say nothing about overheads. Rent, software, insurance, your own wages and every other cost that does not move with the next unit sold sit entirely outside both formulas. A 60% margin on twelve sales a month does not cover a workshop. To find the point where the fixed costs are actually covered, run the break-even calculator.
- They are per unit, not per month. A 70% margin on a product that sells four times a year earns less than a 25% margin on one that sells weekly. Margin measures quality; only volume turns it into money, and the two frequently move in opposite directions. What stock actually earns per pound tied up is worked in inventory turnover.
- They do not include the cost of finding the buyer. Neither formula has a line for advertising. A 45% margin with nothing left after acquisition is a hobby with good paperwork, which is the arithmetic in customer acquisition cost.
- They cannot tell you what the market will pay. The formula in the fourth section returns a price the margin requires, not a price anybody will accept. If the number that comes out is above what the item sells for elsewhere, the answer is not to charge it and hope; it is to change the cost, the product or the customer.
- They are only as honest as the cost you feed them. Every worked figure here assumed the cost was complete. Leave out packaging, postage, payment fees or the hours that went into making the thing, and both percentages are flattering fiction — correctly calculated, and wrong.
Arithmetic and general information only — not financial, tax, legal or investment advice. Your own figures, and your own accountant, decide what any of this means for you.
Do the quick version free
free profit margin and markup calculator — put a cost and a price into it and it returns the margin, the markup and the price a target margin would need, so you never have to do the conversion by hand. It runs in your browser and nothing you type is sent anywhere.
See inside the toolkit first
The Business Sale Readiness Toolkit sample shows every sheet, every row of the inputs sheet and the actual Excel formulas — no email, no account. If the sample is not worth your afternoon, the full workbook will not be either.
The tool for this job
The Small Business CFO Operating System ($39) is a working spreadsheet that holds your real cost per unit and shows the margin each product leaves once every cost is counted, month after month. One-time purchase, instant download.
Frequently asked questions
What is the difference between margin and markup?
Both describe the same gross profit, divided by different things. Markup divides the profit by the cost; margin divides it by the price. An item costing £10 and selling for £15 makes £5, which is a 50% markup on the £10 cost and a 33.3% margin on the £15 price. Margin is always the smaller number on anything sold at a profit.
How do I convert markup to margin?
Margin = markup ÷ (1 + markup). A 50% markup is 0.50 ÷ 1.50 = 33.3% margin. Going the other way, markup = margin ÷ (1 − margin), so a 40% margin needs 0.40 ÷ 0.60 = 66.7% markup. The rule worth memorising is that doubling the cost is a 100% markup and a 50% margin.
How do I price an item for a 40% margin?
Divide the cost by 0.60 — that is, by 1 minus the target margin. An item costing £12 needs to sell at £12 ÷ 0.60 = £20.00, which leaves £8.00 of profit on a £20.00 price. Multiplying the cost by 1.40 instead gives £16.80 and a margin of only 28.6%, which is the most common pricing error in small retail.
Why did my 40% markup only produce a 28.6% margin?
Because the 40% was added to the cost but the margin is measured against the price. On a £12 cost, adding 40% gives £16.80 and £4.80 of profit, and £4.80 ÷ £16.80 is 28.6%. The shortfall widens as the numbers rise: a 50% markup lands 16.7 points below a 50% margin, and a 60% markup lands 22.5 points below.
Should I use margin or markup in my own pricing?
Use markup when you are working forwards from a supplier invoice and margin when you are checking what a sale leaves behind, and convert between them rather than treating them as the same figure. Whichever you use, make sure the cost includes packaging, postage and whatever the sales platform deducts, because a margin calculated on the supplier price alone overstates what you keep.