The same profit measured against two different numbers
A shop buys a desk lamp for 80 and sells it for 100. The gross profit is 20. Divide that 20 by the cost and you get a markup of 25%. Divide the same 20 by the selling price and you get a margin of 20%. Neither figure is wrong. They answer different questions.
Markup tells you how far above cost you set the price. Margin tells you how much of each sale is left once the cost of the item is paid. When there is a profit, the price is always larger than the cost, so the margin is always the smaller percentage.
| Line | Amount |
|---|---|
| Cost of the lamp | 80 |
| Selling price | 100 |
| Gross profit | 20 |
| Markup (profit ÷ cost) | 25% |
| Margin (profit ÷ price) | 20% |
The confusion is costly because people often set prices with markup and then judge results with margin. A plan that says the business needs a 25% margin is not met by adding 25% to cost.
Converting markup to margin and back
Work in decimals. A 25% markup is 0.25, so margin = 0.25 ÷ 1.25 = 0.20, or 20%. A 40% margin is 0.40, so markup = 0.40 ÷ 0.60 = 0.6667, or 66.67%.
| Markup on cost | Selling price | Margin on price |
|---|---|---|
| 10% | 110 | 9.09% |
| 20% | 120 | 16.67% |
| 25% | 125 | 20% |
| 33.33% | 133.33 | 25% |
| 50% | 150 | 33.33% |
| 66.67% | 166.67 | 40% |
| 100% | 200 | 50% |
| 150% | 250 | 60% |
| 200% | 300 | 66.67% |
Two patterns stand out. At low percentages the two numbers are close: a 10% markup is a 9.09% margin. As prices rise further above cost they pull apart. Doubling the cost is a 100% markup but only a 50% margin. Markup can grow without limit. Margin gets closer to 100% but never reaches it while the item costs something.
Profit Margin CalculatorEnter one selling price and its direct cost to see gross profit, margin and markup side by side.Pricing to a target margin without falling short
The most common mistake runs like this. A business wants a 30% margin, so it multiplies cost by 1.30. On an item costing 640, that gives a price of 832 and a profit of 192. But 192 ÷ 832 is a 23.08% margin. What the business actually set was a 30% markup.
To reach a target margin, divide cost by one minus the margin: 640 ÷ 0.70 = 914.29. The profit is then 274.29, which is 30.00% of the price and 42.86% of the cost.
| Method | Price | Gross profit | Margin | Markup |
|---|---|---|---|---|
| Cost × 1.30 | 832.00 | 192.00 | 23.08% | 30.00% |
| Cost ÷ 0.70 | 914.29 | 274.29 | 30.00% | 42.86% |
The gap is 82.29 per unit. At 500 units a month, that is 41,145 of gross profit the plan expected but the price never collects.
How discounts eat margin faster than you expect
A discount comes off the price, but the cost stays the same, so the whole discount comes out of profit. Go back to the lamp that costs 80 and sells for 100. A 20% discount brings the price down to 80, which equals the cost, so the gross profit is zero. A discount equal to your margin wipes out the margin. A discount equal to your markup, 25% here, takes the price to 75 and loses 5 on every lamp.
Each 5 points of discount removes a quarter of the original profit. At 10% off, profit per lamp halves from 20 to 10, so you would need to sell twice as many lamps to earn the same total gross profit. Work out the sale price with the Discount Calculator, then enter that price and the unchanged cost in the margin calculator. The 5% discount row changes gross margin from 20% to 15.79%: a 4.21 percentage-point fall, or about 21.05% of the original margin. The percent change guide explains those two measures.
Which figure to use for which job
Markup is handy when you build a price up from cost: take the landed cost and add a set percentage. Margin is the figure accounting reports use. A multi-step income statement shows gross profit as net sales minus cost of goods sold, and the gross profit margin ratio divides that gross profit by net sales. If a business plan, lender or benchmark gives you a margin, convert it before you set prices.
Gross margin is also not contribution margin. Contribution treats only costs that vary with each unit as the cost, and it is the number that drives a break-even point. The break-even worked example shows that calculation.
What this comparison does not cover
- Operating costs. Rent, salaries, marketing and interest come after gross profit. A product with a healthy 40% gross margin can still belong to a business that loses money overall.
- The full cost of the item. Leave out freight, import duty, packaging or card and platform fees and you understate cost, which overstates both margin and markup.
- Tax-inclusive prices. If a shelf price includes sales tax, take the tax out before you measure margin. The Tax on Price Calculator separates the two.
- Returns and spoilage. Refunds, breakage and expired stock reduce the margin you actually realize below the margin you planned.
- Product mix. The margin across several products is total gross profit ÷ total revenue. It is not a simple average of each product's margin.