Margin and markup both measure profit, but they divide it by different numbers. Mixing them up is one of the most common pricing mistakes in small business: a seller applies a 40% markup believing it produces a 40% margin, then wonders why the profit looks thin. This guide separates the two formulas and shows how to move between them.
The two formulas
- Gross margin = (revenue − cost) ÷ revenue × 100. Profit measured against the selling price.
- Markup = (revenue − cost) ÷ cost × 100. Profit measured against the cost.
The profit in the numerator is identical in both. Only the denominator changes, and that is the whole source of the confusion.
Worked example: cost $60, sell $100
- Profit = 100 − 60 = $40.
- Margin = 40 ÷ 100 × 100 = 40%.
- Markup = 40 ÷ 60 × 100 = 66.67%.
One product, one profit, two different percentages. Saying "our margin is 66%" or "our markup is 40%" would both be wrong for this item.
The same profit at a glance
| Cost | Selling price | Profit | Margin | Markup |
|---|---|---|---|---|
| $50 | $100 | $50 | 50% | 100% |
| $60 | $100 | $40 | 40% | 66.67% |
| $75 | $100 | $25 | 25% | 33.33% |
| $80 | $100 | $20 | 20% | 25% |
Notice that markup is always larger than margin whenever there is any profit, because the cost is smaller than the selling price.
Converting between them
You do not need to reconstruct cost and price each time. The two are linked by simple formulas:
- Markup = margin ÷ (1 − margin), with the percentages written as decimals. A 40% margin gives 0.40 ÷ 0.60 = 0.6667 = 66.67% markup.
- Margin = markup ÷ (1 + markup). A 50% markup gives 0.50 ÷ 1.50 = 0.3333 = 33.33% margin.
The expensive mistake
A shop buys an item for $100 and wants a 40% margin, so it adds 40% to the cost and sells at $140. Check the real margin: profit 40 ÷ 140 = 28.6%, not 40%. To actually earn a 40% margin, the price must be cost ÷ (1 − 0.40) = 100 ÷ 0.60 = $166.67.
Which one should you use?
Use margin when you report profitability, compare products, or check whether a price covers overheads and leaves a profit. Use markup when you set prices from cost, because that is the direction you naturally move: cost plus a percentage. Wholesale and retail often negotiate in markup, while accounts and investors read margin. Keep track of which one a given number represents before acting on it.
Watch the edge cases
Margin can never reach 100% (you would need zero cost) and approaches it as cost falls. Markup has no upper limit. A 100% margin is impossible; a 100% markup simply doubles the cost. Also decide whether "cost" means just the goods or includes shipping, fees and packaging — the formula does not care, but consistency does.
Enter your cost and selling price in our margin calculator to see gross margin, markup and profit together, and work backwards from a target margin. If you are setting a sale price instead, the discount percentage guide covers the opposite direction, and the percentage increase formula helps when prices change over time.