Markup vs margin: how to price for the profit you want
Adding 40% to cost does not give a 40% margin. The difference between markup and margin, a conversion table, and the formula to price for a target margin.
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Tools for this job: Percentage Calculator · Discount Calculator · Tax Calculator
A small business owner buys a product for 60, wants a 40% margin, adds 40% and sells it for 84. The actual margin is 28.6%, not 40%. Markup and margin are both percentages of profit, but they are measured against different numbers, and mixing them up quietly erodes profit on every sale.
The definitions
- Markup is profit as a percentage of cost: (price − cost) ÷ cost.
- Margin is profit as a percentage of price: (price − cost) ÷ price.
Buy at 60, sell at 100. Profit is 40. Markup is 40 ÷ 60 = 66.7%. Margin is 40 ÷ 100 = 40%. Same sale, two different percentages. Margin is always smaller than markup.
Conversion table
| Margin | Markup needed |
|---|---|
| 10% | 11.1% |
| 20% | 25% |
| 25% | 33.3% |
| 30% | 42.9% |
| 40% | 66.7% |
| 50% | 100% |
| 60% | 150% |
The formulas: markup = margin ÷ (1 − margin), and margin = markup ÷ (1 + markup), with both written as decimals. A 100% markup, doubling the cost, gives a 50% margin.
Price for a target margin
To hit a margin, divide the cost by (1 − margin). For a 40% margin on a cost of 60: 60 ÷ 0.60 = 100. This is a reverse percentage, and it works the same way as finding a price before tax. Check it with the Percentage Calculator: what percent of 100 is 40? Exactly 40%.
Which one to use
- Margin is what accountants, investors and most retail benchmarks quote, because it relates directly to revenue. “We run at a 35% gross margin” means 35 of every 100 in sales is gross profit.
- Markup is convenient for pricing from a supplier price list: cost × 1.5 is a 50% markup.
- Say which you mean in any price discussion, especially with partners or staff.
Discounts eat margin fast
A 20% discount on an item with a 40% margin cuts the profit in half. Sell at 100 with a cost of 60 and profit is 40; discount to 80 and profit is 20. To keep the same total profit, you would need to sell twice as many. Run sale prices through the Discount Calculator and compare the result with your cost before agreeing to a promotion.
In a spreadsheet
With cost in column A and price in column B, margin is =(B2-A2)/B2 and markup is =(B2-A2)/A2, formatted as percentages. To set a price from a target margin in cell C1, use =A2/(1-C1). Keeping the margin in one cell means a change of target reprices every product at once, and nobody adds a markup by mistake.
Remember tax
Calculate margin on prices before VAT or sales tax. If you sell at 120 including 20% VAT, the price for margin purposes is 100; the tax belongs to the government. The Tax Calculator removes tax from a total. For the reverse-percentage method in more detail, see reverse percentages.