Margin vs markup, and why mixing them up costs you money
Margin and markup both describe the gap between what a product costs you and what you sell it for. They use the same profit. They divide it by different things. That one difference is enough to make a store look healthier on paper than it is in the bank.
The two formulas
Take a mug that costs you $6 and sells for $15. The profit is $9 either way.
Markup compares the profit with the cost:
markup = profit ÷ cost = 9 ÷ 6 = 150%
Margin compares the profit with the selling price:
margin = profit ÷ price = 9 ÷ 15 = 60%
Same mug, same $9. A 150% markup and a 60% margin. Neither is wrong. They answer different questions:
- Markup: how much did I add on top of what I paid?
- Margin: of every dollar a customer pays, how much do I keep?
Suppliers, wholesalers and old pricing rules (“double it”) usually talk in markup. Accounts, investors and most reports talk in margin. Trouble starts when a number from one world gets compared with a number from the other.
Converting between them
You never need to know the actual prices to convert. With markup and margin written as decimals:
margin = markup ÷ (1 + markup)
markup = margin ÷ (1 − margin)
| Markup | Margin |
|---|---|
| 25% | 20.0% |
| 50% | 33.3% |
| 75% | 42.9% |
| 100% | 50.0% |
| 150% | 60.0% |
| 200% | 66.7% |
| 300% | 75.0% |
Two things stand out. Margin can never reach 100%, because you would need a product that cost nothing. Markup has no ceiling at all. And the gap between them grows quickly: at the top of the table, a 300% markup is “only” a 75% margin.
Where the mix-up bites
Planning with a margin target, pricing with a markup
Say you know you need a 50% margin to cover ads, fees and overheads. A supplier quotes you $10 a unit, and you add 50% on top: $15. Your margin is $5 ÷ $15, which is 33%, not 50%. To get a real 50% margin from a $10 cost you need a 100% markup and a $20 price.
On one product this looks small. Across a catalogue priced the same way, the store is running on two-thirds of the margin it planned for.
Reading a “40% margin” that is really a markup
If a supplier or a course says products should have “40% margin” and they mean markup, the real margin is 28.6%. After a typical card fee of around 3% and some shipping, there may be very little left.
When someone gives you a percentage, ask which one it is. If they cannot say, work it out from the prices yourself.
Fees come out of margin, not markup
Platform fees, payment fees and ads are charged on the selling price, so they are naturally percentages of margin. A product with a 45% margin that pays 3% in card fees and 15% of revenue in ads is left with 27% to cover everything else. Thinking in markup hides this, because the fees are not a percentage of the cost.
Which one to use
For pricing and for checking whether the store makes money, use margin. It lines up with how fees and ad costs work, and it is the number your accountant will use.
Markup is still handy when buying stock: “this needs at least a 100% markup to work” is a quick filter when looking at a supplier’s price list. Just convert before you compare it with anything else.
A quick check with your own numbers
- Take a product’s full cost per unit, including the inbound shipping you paid to get it to you.
- Take the price customers actually pay, after any regular discount.
- Profit = price − cost. Divide by the price for margin, by the cost for markup.
- If you want the margin after fees and shipping, subtract those too before dividing.
The profit margin calculator does steps 3 and 4 and shows both numbers. If you are starting from the margin you want and need a price, the markup calculator works backwards from it, fees included.