Markup and margin are two of the most commonly confused terms in small business pricing. Both describe profit, both are percentages, and both get used when setting prices — but they are calculated on different bases, and confusing them leads to real pricing mistakes. A shop owner who thinks they are earning a 40% margin when they have really only applied a 40% markup is leaving money on the table with every sale. This guide explains the difference clearly.
The key difference
The difference comes down to what you divide profit by. Markup measures profit as a percentage of cost. Margin measures profit as a percentage of the selling price (revenue). Same dollar profit, different denominator — which is exactly why the two percentages never match for the same product.
- Markup = (Price − Cost) ÷ Cost × 100
- Margin = (Price − Cost) ÷ Price × 100
A worked example
Hypothetical worked example
Business type: Small online store selling accessories
Revenue: $100 selling price per unit
Costs: $60 cost per unit
Calculation
Profit = $100 − $60 = $40 Markup = $40 ÷ $60 × 100 = 66.7% Margin = $40 ÷ $100 × 100 = 40%
Same $40 profit, but a 66.7% markup and a 40% margin. If the owner assumed the two numbers were equal, they would systematically under-price every product they sell.
Converting between markup and margin
| Markup | Equivalent margin |
|---|---|
| 15% | 13% |
| 25% | 20% |
| 50% | 33% |
| 100% | 50% |
| 200% | 67% |
To convert a target margin into the markup needed to achieve it, use: Markup = Margin ÷ (1 − Margin). For a 50% margin, that is 0.5 ÷ 0.5 = 1, or 100% markup.
When to use each
Use markup when you know your cost and want to set a selling price — it is the natural starting point because you build up from cost. Use margin when you want to understand profitability relative to revenue, compare products, or report financial performance to a partner or lender. Retailers often think in markup when purchasing stock, then track margin when analyzing overall profitability.
Common mistakes
- Treating a supplier-quoted margin as if it were a markup percentage, and under-pricing as a result.
- Assuming a 50% markup and a 50% margin produce the same profit — they do not.
- Using markup alone to judge overall business profitability without checking margin.
- Forgetting to re-run the conversion when costs change, leaving stale pricing in place.
Practical tips
- Always confirm whether a number you are given is a markup or a margin before pricing.
- Use the markup-to-margin table above as a quick sanity check.
- Set prices using markup, then verify the resulting margin meets your target.
- Document your pricing formula so the whole team applies markup and margin consistently.
Use the markup calculator to set a selling price from cost, and the profit margin calculator to confirm the margin that price produces.
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Educational purpose. This resource provides educational information to help users understand small business financial concepts. It does not provide personalized financial, tax, or accounting advice.
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