Margin vs Markup: How to Calculate Profit Margin and Price a Product

Two numbers that sound alike

Margin and markup both describe profit as a percentage, but they divide by different things. That one difference is behind a great many mispriced products, because people say “30%” and mean one while their supplier, accountant or software means the other.

• Profit = selling price − cost.
• Margin = profit ÷ selling price. It answers: of every unit of sales, how much is profit?
• Markup = profit ÷ cost. It answers: how much did I add on top of what it cost me?

With a cost of 60 and a price of 100, the profit is 40. The margin is 40 ÷ 100 = 40.0% and the markup is 40 ÷ 60 = 66.7%. Markup is larger whenever there is a profit, because cost is smaller than price.

Converting between margin and markup

Margin = markup ÷ (1 + markup), and markup = margin ÷ (1 − margin), with the percentages written as decimals. The table gives the markup you need for common margins.

Notice that a 50% margin needs a 100% markup, which means doubling the cost, and that margin can never reach 100% while the product has any cost, whereas markup can be any size.

Pricing for a margin you want

The usual mistake is to add the target percentage to the cost. To earn a 30% margin on goods that cost 70, divide by (1 − 0.30): 70 ÷ 0.70 = 100. Adding 30% instead gives 91, which is only a 23.1% margin, so you earn 9 less per unit than planned.

The rule to remember: markup multiplies cost, margin divides it. Price = cost × (1 + markup), or price = cost ÷ (1 − margin).

Real selling price: tax, discounts and fees

A calculator that only knows cost and price overstates what you keep. Four things come between the label price and your profit.

• Sales tax, VAT or GST is collected for the government, so it is not your revenue. If the label already includes it, divide by (1 + tax rate) first.
• A discount lowers the price but not the cost, so margin falls faster than the discount.
• Marketplace, card and commission fees are a percentage of the sale.
• Shipping, packaging and advertising per unit are costs of the sale even though they are not the cost of the goods.

Tax first. A price of 117 with 17% tax included is 100 of revenue and 17 of tax, so a cost of 50 gives a margin of 50% on 100, not on 117.

Discounts. Selling the 60-cost, 100-price item at 20% off brings the price to 80, the profit from 40 to 20 and the margin from 40% to 25%. You must sell twice as many units to earn the same total profit.

Fees and extras. An item that costs 40 and sells for 100 has a gross margin of 60%. Take off a 10% marketplace fee (10) and 5 of shipping and the profit is 45, a net margin of 45%. Ten units earn 450.

To keep a 30% net margin after those fees, the price has to rise to 75, found from (cost + extras) ÷ (1 − fee − margin) = 45 ÷ 0.60.

Gross margin and net margin

Gross margin counts only the direct cost of the goods. Net margin counts every cost of the business, including rent, wages, utilities, interest and tax. A product can have a high gross margin and still lose money for the business if its overheads are higher than the gross profit it brings in. When you read someone’s claim about a “good margin”, check which one they mean, and compare like with like within the same trade.

The calculator’s Real selling price mode includes the fees and per-unit costs you enter in the net margin. Overheads such as rent are not part of any single product’s margin, which is why the break-even calculator treats them as fixed costs.

Margin and markup in Excel or Google Sheets

With the cost in B1 and the price in B2, margin is =(B2-B1)/B2, markup is =(B2-B1)/B1, and profit is =B2-B1. Format the result cells as percentages. For a target margin in C1 written as 0.3, the price is =B1/(1-C1). For a whole product list, put name, cost and price in three columns and copy the formulas down, or paste the list into the Many products mode of the calculator and download the result as a CSV.

Common mistakes

• Adding the margin percentage to cost instead of dividing by one minus the margin.
• Calling a markup a margin in a quote, so the customer or partner expects a different profit.
• Measuring margin on a tax-inclusive price.
• Ignoring marketplace fees and shipping when setting a price.
• Offering a discount without working out the extra units needed to make it pay.
• Treating gross margin as profit for the business.

Common questions

How this guide was prepared

This guide uses the standard definitions of gross margin and markup. Every figure in it is produced by the same code that runs the profit margin calculator, and the formulas are shown so that you can check them by hand or in a spreadsheet.

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