Profit Margin vs Markup: How to Calculate Both
By Akmal Ali · Published · Updated · 4 min read
Subtract the cost from the revenue to get the profit, then divide the profit by the revenue and multiply by 100. Selling for 100 something that cost 60 makes a profit of 40, a 40% margin. Markup divides the same profit by the cost instead, which gives 66.67%.
Two people can describe the same sale as “40% profit” and “67% profit” and both be right. One means margin, the other markup. Mixing them up is one of the most common pricing mistakes in small businesses, so this guide starts with the terms, then works through margin, markup and pricing with examples.
The terms
- Revenue (or selling price): what the customer pays you.
- Cost: what the item or sale costs you, such as the purchase price or materials.
- Profit: the difference between the two.
profit = revenue − cost
profit margin (%) = profit ÷ revenue × 100
Margin tells you how much of every sale you keep. A 40% margin means 40 of every 100 in sales is profit, before anything the cost figure leaves out.
Worked example: one product
You buy a lamp for 60 and sell it for 100.
- Profit: 100 − 60 = 40.
- Margin: 40 ÷ 100 × 100 = 40%.
If the price falls to 80, the profit drops to 20 and the margin to 20 ÷ 80 × 100 = 25%. If it falls below 60, the profit is negative: a loss.
Profit Margin Calculator
Enter a cost and a selling price to see profit, margin and markup together, or a target margin to get the price.
What is the difference between margin and markup?
Markup uses the same profit but compares it with the cost instead of the selling price:
markup (%) = profit ÷ cost × 100
For the lamp, the markup is 40 ÷ 60 × 100 = 66.67%, while the margin is 40%. Markup is always the larger figure. Margin can never reach 100%, because the profit can’t exceed the price; markup has no upper limit.
| Markup | Cost | Selling price | Margin |
|---|---|---|---|
| 25% | 80 | 100 | 20% |
| 50% | 60 | 90 | 33.33% |
| 66.67% | 60 | 100 | 40% |
| 100% | 50 | 100 | 50% |
To convert between the two, with both written as decimals:
margin = markup ÷ (1 + markup)
markup = margin ÷ (1 − margin)
Setting a price for a target margin
selling price = cost ÷ (1 − target margin ÷ 100)
To make a 35% margin on an item that costs 65, the price is 65 ÷ 0.65 = 100. A common mistake is to add the margin percentage to the cost instead: 65 + 35% is 87.75, which is only a 25.9% margin.
Gross, operating and net margin
For a whole business, the word “cost” can mean different things, and each gives a different margin. Take a shop with 250,000 in sales over a year:
| Step | Amount | Margin |
|---|---|---|
| Revenue | 250,000 | |
| Cost of the goods sold | −150,000 | |
| Gross profit | 100,000 | Gross margin 40% |
| Rent, wages and other running costs | −70,000 | |
| Operating profit | 30,000 | Operating margin 12% |
| Interest and tax | −8,000 | |
| Net profit | 22,000 | Net margin 8.8% |
Gross margin only counts the direct cost of what you sold. It’s the one you usually mean when pricing a product, and the one the profit margin calculator gives when you enter the item’s cost. Net margin is what is left after everything else, and it is usually much lower.
How much does a discount cut the margin?
A discount comes straight out of profit, so it cuts the margin by more than its own percentage. The lamp sells for 100 at a 40% margin. At 20% off, it sells for 80, the profit falls from 40 to 20, and the margin drops to 25%: the profit per sale has halved. Work out the sale price first with the discount calculator, or see how to calculate a discount.
Common mistakes
- Quoting markup as margin. A 30% markup on a cost of 70 gives a price of 91 and a margin of only 23.1%.
- Leaving costs out. Shipping, payment fees, packaging and returns all reduce profit. Include them in the cost if you want the margin to reflect what you keep.
- Mixing prices with and without tax. Compare cost and price on the same basis, usually both without VAT or sales tax.
- Averaging percentages. A 50% margin on a small sale and a 10% margin on a large one don’t average to 30%. Add up the profits and the revenues, then divide.
These are calculations to help you understand and compare figures. For decisions about pricing, tax or accounts in your own business, talk to an accountant.
Frequently Asked Questions
What is a good profit margin?
There is no single figure. Margins vary widely between industries, and between products in the same business. Compare your margin with your own past results and with businesses like yours, and make sure it covers your running costs.
What is the difference between gross and net profit margin?
Gross margin only subtracts the direct cost of the goods sold. Net margin also subtracts running costs such as rent and wages, interest and tax, so it is usually much lower.
How do I convert markup to margin?
Write the markup as a decimal and divide it by one plus the markup. A 50% markup is 0.5 ÷ 1.5 = 0.333, a 33.3% margin.
How does a discount affect my margin?
It comes straight out of profit, so the margin falls faster than the price. An item at a 40% margin sold at 20% off has a margin of 25%, and half the profit per sale.