Margin vs markup: the pricing mistake that costs profit
Margin and markup start from the same profit and divide by different numbers. Mixing them up underprices everything.
Same profit, two percentages
An item costs $40 and sells for $60, a profit of $20. Margin divides the profit by the price: $20 ÷ $60 = 33.3%. Markup divides it by the cost: $20 ÷ $40 = 50%. Both are correct; they answer different questions. Margin tells you how much of each sale you keep, which is what accounts and investors use. Markup tells you how much to add to the cost, which is what many people use at the shelf.
The mistake
Suppose you need a 40% margin and add 40% to the cost: $40 × 1.40 = $56. The profit is $16, and $16 ÷ $56 is a 28.6% margin, well short of 40%. On sales of $100,000 that gap is more than $11,000 of profit.
To get a 40% margin, divide the cost by (1 − margin): $40 ÷ 0.60 = $66.67. That is a 66.7% markup.
Converting between them
Markup = margin ÷ (1 − margin), and margin = markup ÷ (1 + markup). A 20% margin is a 25% markup, 25% is 33.3%, 33.3% is 50%, 50% is 100%. A margin can never reach 100%, because that would need an infinite price, while a markup can be any size.
The profit margin calculator shows both figures for any cost and price, and finds the price for a target margin or markup.
Include all the costs
The cost in the formula should include everything it takes to sell the item: purchase price, shipping in, payment fees, packaging and returns. A product that looks like a 40% margin at its purchase cost can be a 25% margin once a 3% card fee, free shipping and a 5% return rate are counted.
Discounts eat margin fast
A 20% discount on the $66.67 price brings it to $53.33, and the margin falls from 40% to 25%, not to 20%. Before running a sale, work out the margin at the sale price and the extra volume needed to earn the same profit.
A pricing table worth keeping
Margin 10% is a markup of 11.1%. Margin 20% is 25%. Margin 25% is 33.3%. Margin 30% is 42.9%. Margin 40% is 66.7%. Margin 50% is 100%. Margin 60% is 150%. Margin 75% is 300%. The higher the margin you want, the faster the markup has to grow, which is why high-margin businesses quote markups of several hundred percent.
Which one to use where
Use margin when you talk about profitability, compare products or read financial statements, because it relates profit to sales. Use markup when you set a price from a cost, because that is how the calculation runs. Writing "40% margin (66.7% markup)" in a price list avoids the mix-up entirely, and the profit margin calculator prints both for any price.
A worked pricing decision
A shop buys a lamp for $40, pays $3 to ship it in and loses about $2 per lamp to card fees and returns, so the real cost is $45. To keep a 40% margin it must charge $45 ÷ 0.60 = $75. Pricing at a 40% markup on the $40 purchase price would give $56, a margin of only about 20% on the real cost of $45 (an $11 profit on $56). The difference comes from two mistakes at once: using markup instead of margin, and leaving costs out. Fix both and the price follows. Run the numbers for your own products in the profit margin calculator before setting a price list, and again whenever a supplier raises its prices. A price list that shows cost, price, margin and markup side by side makes these mistakes visible to everyone who sets prices.