Margin and markup are not the same
Both describe profit as a percentage, but against different bases. Margin is profit as a share of the selling price; markup is profit as a share of the cost. Because the price is always larger than the cost when you make a profit, the margin is always the smaller number. Mixing them up is one of the most common pricing errors in small businesses.
Profit = price − cost
Margin = profit ÷ price × 100
Markup = profit ÷ cost × 100
Price for a target margin = cost ÷ (1 − margin)
Price for a markup = cost × (1 + markup)
Worked examples
- An item costs $12 and sells for $30. Profit is $18, so the margin is 18 ÷ 30 = 60% and the markup is 18 ÷ 12 = 150%.
- To earn a 40% margin on the same $12 item, the price must be 12 ÷ (1 − 0.40) = $20.00. That is a markup of 66.67%.
- A 50% markup on $12 gives a price of 12 × 1.5 = $18.00, but only a 33.33% margin.
Converting between margin and markup
| Markup | Margin |
|---|---|
| 25% | 20% |
| 50% | 33.33% |
| 66.67% | 40% |
| 100% | 50% |
| 150% | 60% |
| 300% | 75% |
Margin = markup ÷ (1 + markup) Markup = margin ÷ (1 − margin)
A 100% markup (doubling the cost) is a 50% margin; a margin can never reach 100%, because that would mean the cost is zero.
Which number should you use?
Retailers and wholesalers often think in markup, because they start from the cost of goods. Accountants, investors and most financial reports use margin, because it shows how much of each dollar of sales is profit. When you set prices, decide which you mean and use the right formula: a "40% margin" target priced with a 40% markup leaves you at only 28.6% margin.
Gross margin versus net margin
This calculator gives the margin on a single item from its direct cost, often called gross margin. Your net margin after marketplace fees, shipping, advertising, rent, software and your own time is lower. For online sales, the seller fee calculator shows profit after marketplace fees and postage.
Pricing for discounts
If you plan to run sales, build them in. A 20% discount on the $30 price above leaves $24, and the margin falls from 60% to 50%. On the $20 price with a 40% margin, the same discount leaves $16 and a margin of only 25%. Use the discount calculator to check sale prices.
Margin across several products
When you sell more than one product, do not average the margins. Add up total profit and divide by total sales. Suppose one item costs $12 and sells for $30 (60% margin) and another costs $8 and sells for $10 (20% margin). Selling one of each brings $40 of sales and $20 of cost, a 50% margin, not the 40% you would get by averaging 60% and 20%. If you sell three of the cheaper item for every one of the dearer item, sales are $60 and costs $36, so the blended margin falls to 40%. Your product mix matters as much as each item's margin.
Contribution margin
For businesses with fixed costs such as rent or software subscriptions, the profit per unit after its variable costs (materials, fees, shipping) is called the contribution margin. Divide your monthly fixed costs by the contribution per unit to find how many units you must sell to break even. For example, $500 of monthly fixed costs and $10 of contribution per unit means 50 units a month just to cover overheads.
Common mistakes
- Using markup where margin is meant (or the reverse).
- Leaving costs out of the cost figure, such as inbound shipping or packaging.
- Applying a discount to the margin instead of to the price.
Frequently asked questions
What is the difference between margin and markup?
Margin is profit divided by price; markup is profit divided by cost. A $12 item sold for $30 has a 60% margin and a 150% markup.
How do I price for a 40% margin?
Divide the cost by 0.6. A $12 cost needs a $20 price.
Is a 50% markup the same as a 50% margin?
No. A 50% markup is a 33.33% margin; a 50% margin needs a 100% markup.
What is a good profit margin?
It varies widely by industry and business model; compare with your own costs and with businesses like yours.
Sources
- US Small Business Administration (sba.gov). Calculate your startup costs and pricing basics.
- Corporate Finance Institute. Profit margin and markup definitions.
Last reviewed 27 October 2026. Results are estimates; see our disclaimer.