Margin vs. markup: the difference your pricing needs.
The same profit can produce two very different percentages. Here’s how to keep them straight.
Same dollars, different denominators
Imagine an item that costs $60 and sells for $100. The gross profit is $40. To calculate margin, divide that $40 by the $100 selling price: 40%. To calculate markup, divide it by the $60 cost: about 66.67%. Neither figure contradicts the other. They answer different questions.
Margin asks what share of each sales dollar remains after the costs included in your calculation. Markup asks how much you added relative to those costs. The base of the percentage changes.
Why a 40% markup does not create a 40% margin
Start with a $60 cost and add a 40% markup: $60 × 1.40 = $84. Profit is $24, and margin is $24 ÷ $84 × 100 ≈ 28.57%. If you intended a 40% margin, that price misses the target.
To find a selling price for a target margin expressed as a decimal m, use price = cost ÷ (1 − m). For a $60 cost and 0.40 margin: $60 ÷ 0.60 = $100. A target margin of 100% is not possible with a positive cost under this formula.
Gross profit still has work to do
The profit in this example is gross profit based on the entered cost. Rent, administration, financing, and other expenses may still need to be paid. Use a consistent definition of cost when comparing products or periods.
If your monthly fixed costs are $5,000 and every unit contributes $20 after variable costs, the simplified break-even point is $5,000 ÷ $20 = 250 units. This assumes the same selling price and variable cost for every unit.
A simple pricing check
Before changing a price, write down the cost, proposed selling price, gross profit, margin, and markup together. Then check whether the resulting contribution can support the business volume you expect.
Use the Margin and Markup calculators on the same inputs. Seeing the two percentages side by side makes it easier to spot a mistaken denominator. All examples use USD and rounded display values.
Make the numbers your own.
Put this guide into practice with a free calculator.