Margin vs. markup: the difference and when each matters

Margin and markup are the two most commonly confused pricing numbers in small business. They both measure the same profit — the difference between what something costs you and what you sell it for — but they express it against different bases.

• Margin is profit as a share of revenue (what the customer pays).
• Markup is profit as a share of cost (what you paid).

That one difference in the denominator means the numbers never agree (except at zero profit), and picking the wrong one misprices your product.

Worked example: a $100 sale with $60 of cost

Sell something for $100 that cost you $60. Gross profit is $40.

• Margin: $40 ÷ $100 = 40%
• Markup: $40 ÷ $60 = 66.7%

The profit is identical. The percentages differ because margin compares the profit to the selling price, while markup compares it to what you paid. If you price with a 40% margin in mind but compute markup by accident, you undercharge; if you confuse a 66.7% markup for a margin, you price far above the market.

When to use margin

Use margin for anything measured against the selling price:

• Financial statements — profit margins, gross margin, net margin are all revenue-relative by convention.
• Comparing performance across products or periods — because margin uses the same base (revenue) everywhere, the numbers line up.
• Budgeting and target pricing — “we need a 55% gross margin on this product line” is a pricing target expressed against what customers pay.

When to use markup

Use markup for anything measured against what you paid:

• Retail and wholesale cost-plus pricing — “we buy at $40 and sell at cost plus 30%” is a markup statement.
• Restaurant food-cost math — standard cost percentages are typically expressed as markup on the cost of ingredients.
• Bidding on jobs — contractors commonly estimate cost and apply a markup for overhead and profit.

Converting between the two

The formulas are symmetric:

• Markup → margin: margin = markup / (1 + markup)
• Margin → markup: markup = margin / (1 − margin)

A 50% markup is a 33.3% margin. A 40% margin is a 66.7% markup. A common practical rule: a 100% markup is a 50% margin — the highest markup percentage that still leaves room in the denominator.

The one-number sanity check

If your margin and markup are the same number, something is off — it should only happen at zero profit. If a tool or spreadsheet asks you for one and you feed it the other, every result downstream shifts. Keep both visible when you price: our profit margin calculator shows margin and markup side by side for exactly this reason.