Margin and markup both describe the gap between what something costs you and what you sell it for, and people often use the words interchangeably. They are not the same number. A 30% markup and a 30% margin produce different prices, and confusing the two is one of the most common reasons small businesses earn less than they planned.
In this article you will learn:
- the exact definitions of gross margin and markup
- the formulas to convert one into the other
- how to set a price from a target margin
- a conversion table for common percentages
- the pricing mistakes that come from mixing them up, including the effect of discounts
Definitions
Both measures start with the same dollar figure, gross profit:
Gross profit = selling price − cost
Here "cost" means the direct cost of the product or service (materials, wholesale price, direct labour), not overheads such as rent or software subscriptions. The two percentages differ in what they divide by.
Markup divides profit by cost:
Markup = (price − cost) ÷ cost
Margin (gross margin) divides profit by price:
Margin = (price − cost) ÷ price
Because price is always larger than cost when you make a profit, margin is always the smaller of the two percentages.
Worked example
An item costs you $60 and you sell it for $100.
- Gross profit = $100 − $60 = $40
- Markup = $40 ÷ $60 = 66.67%
- Margin = $40 ÷ $100 = 40%
Same item, same profit, two very different percentages. If someone tells you they "make 40%", you need to know which measure they mean.
Free toolProfit Margin CalculatorGross, operating and net profit margins from revenue and costs, with a clear breakdown and the formulas.Converting between margin and markup
You can convert directly without knowing the actual cost or price. Use decimals (40% = 0.40).
Margin from markup: margin = markup ÷ (1 + markup)
Markup from margin: markup = margin ÷ (1 − margin)
Check with the example:
- Markup 0.6667 → margin = 0.6667 ÷ 1.6667 = 0.40, or 40%
- Margin 0.40 → markup = 0.40 ÷ 0.60 = 0.6667, or 66.67%
Conversion table
| Markup | Equivalent margin |
|---|---|
| 10% | 9.09% |
| 20% | 16.67% |
| 25% | 20.00% |
| 33.33% | 25.00% |
| 50% | 33.33% |
| 100% | 50.00% |
| Target margin | Required markup |
|---|---|
| 10% | 11.11% |
| 20% | 25.00% |
| 30% | 42.86% |
| 40% | 66.67% |
| 50% | 100.00% |
| 60% | 150.00% |
Notice that markup can exceed 100% (selling for more than double your cost), but gross margin can never reach 100%, because that would require the item to cost nothing.
Setting a price from a target margin
If you know the margin you need, the price formula is:
Price = cost ÷ (1 − target margin)
Worked example. A product costs $70 and you want a 30% margin.
- Price = $70 ÷ (1 − 0.30) = $70 ÷ 0.70 = $100
- Check: profit $30 ÷ price $100 = 30% margin
If you prefer to think in markup, use:
Price = cost × (1 + markup)
For a 30% margin, the required markup is 42.86%, and $70 × 1.4286 = $100.00 (rounded).
Free toolMarkup CalculatorConvert between cost, selling price, markup and margin in any direction, with a markup to margin table.The classic mistake: adding your margin as a markup
Suppose you want a 30% margin and simply add 30% to cost.
- Cost $70 × 1.30 = $91 selling price
- Profit = $91 − $70 = $21
- Actual margin = $21 ÷ $91 = 23.08%
You planned for 30% and got about 23%. Across a year of sales, that gap can be the difference between covering overheads and not.
The mistake also happens in reverse. If your supplier quotes a "40% margin" for resellers but you record it as a 40% markup, you will think your costs are higher than they really are and may overprice.
Applying it to services
Service businesses face the same maths, with labour as the main cost. Say a job requires:
- Materials: $150
- Direct labour (hours × loaded hourly cost): $300
- Total direct cost: $450
To reach a 35% gross margin:
- Price = $450 ÷ (1 − 0.35) = $450 ÷ 0.65 = $692.31
If instead you added a 35% markup, you would quote $450 × 1.35 = $607.50, a margin of only about 25.93%.
Remember that gross margin must also cover overheads (insurance, vehicles, software, admin time, marketing) before you make a net profit. A healthy-looking gross margin can still produce a loss if overheads are high relative to sales. Our service pricing calculator helps you build a price from labour, materials and overheads, and the break-even calculator shows how many sales you need to cover fixed costs.
How discounts eat into margin
Discounts come straight out of profit, not out of cost, so a small percentage off the price can remove a large share of your profit.
Worked example. An item costs $60 and normally sells for $100 (40% margin, $40 profit).
| Discount | New price | Profit per sale | New margin | Sales needed to earn the same total profit |
|---|---|---|---|---|
| None | $100 | $40 | 40.00% | 1.00× |
| 10% | $90 | $30 | 33.33% | 1.33× |
| 20% | $80 | $20 | 25.00% | 2.00× |
| 30% | $70 | $10 | 14.29% | 4.00× |
A 20% discount halves your profit per sale in this example, so you would need to sell twice as many units just to earn the same gross profit. Before running a promotion, check whether a realistic increase in volume would make up for it.
Blended margin across several products
Most businesses sell more than one thing, and each item can carry a different margin. The margin for the business as a whole is not the simple average of those percentages. It is total gross profit divided by total revenue.
Worked example. A shop sells two products in a month:
| Product | Units | Price | Cost | Revenue | Gross profit | Margin |
|---|---|---|---|---|---|---|
| A | 100 | $50 | $30 | $5,000 | $2,000 | 40.00% |
| B | 20 | $200 | $170 | $4,000 | $600 | 15.00% |
| Total | $9,000 | $2,600 | 28.89% |
The simple average of 40% and 15% is 27.5%, but the true blended margin is $2,600 ÷ $9,000 = 28.89%. If next month more of the sales come from product B, the blended margin falls even if neither product's price or cost changes. This is why it helps to watch the sales mix, not just individual product margins.
Which measure should you use?
Both are correct; they answer different questions.
- Use markup when you build a price up from cost. It is quick to apply at the point of quoting: cost × (1 + markup).
- Use margin when you look at profitability. Financial statements, budgets and most business reporting express gross profit as a share of revenue, which is margin.
- Pick one for internal targets and label it. Write "40% margin" or "66.67% markup", never just "40%". That single habit prevents most of the errors described here.
A practical approach many businesses take is to set targets as margins, then convert each target to the equivalent markup so staff can apply it easily when pricing. The conversion table above makes that quick.
Other pricing mistakes to avoid
Using an out-of-date cost. Supplier prices, wages and freight change. Recalculate prices when costs move, not once a year.
Leaving out costs that belong in "cost". Payment processing fees, packaging, shipping you pay for, and consumables used on a job all reduce gross profit. If they are not in your cost figure, your margin is overstated.
Averaging margins incorrectly. The margin on total sales is total profit ÷ total revenue. Averaging product margin percentages without weighting by sales can give a misleading figure.
Comparing across industries without context. Typical margins vary widely by industry and business model. Compare against your own costs and goals, and use industry benchmarks only from reliable sources.
Confusing gross and net margin. Gross margin is after direct costs only. Net margin is after all expenses. Be clear which one a target refers to.
Checklist: pricing with margin and markup
- Write down the full direct cost per unit or per job, including fees, packaging and consumables.
- Decide whether your target is a margin or a markup, and write it down that way.
- Use price = cost ÷ (1 − margin) for margin targets.
- Check the result: (price − cost) ÷ price should equal your target margin.
- Confirm that expected gross profit covers overheads at your realistic sales volume.
- Model any discount before offering it.
- Review costs and prices whenever supplier prices or wages change.
Summary
- Gross profit is price minus direct cost. Markup divides it by cost; margin divides it by price.
- Convert with margin = markup ÷ (1 + markup) and markup = margin ÷ (1 − margin).
- To hit a target margin, price = cost ÷ (1 − margin). Adding the margin percentage as a markup underprices: a 30% markup gives only a 23.08% margin.
- Discounts reduce profit per sale sharply; in our example a 20% discount halves it.
- Gross margin must still cover overheads, so check the full picture before setting prices.
Try the numbers for your own products in the profit margin calculator and the markup calculator.