Profit margin is the share of the selling price that is profit. Take the price, subtract the cost, divide by the price, multiply by 100. An item costing $60 and selling for $100 has a $40 profit and a 40% margin.
Markup is the share of the cost that is added on. Same numbers: $40 of profit on a $60 cost is a 66.7% markup. Identical transaction, two very different percentages, and confusing the two is one of the most expensive mistakes in small business pricing — it always errs in the direction of undercharging.
Margin or markup?
The distinction is entirely about the denominator. Margin divides by price; markup divides by cost. Because price is always larger than cost on a profitable sale, the margin is always the smaller number. If someone quotes you a percentage and you cannot tell which they mean, that is the check: a 50% margin is a 100% markup, and the two are only equal when profit is zero.
A quick conversion table:
| Margin | Markup |
|---|---|
| 10% | 11.1% |
| 20% | 25% |
| 25% | 33.3% |
| 33.3% | 50% |
| 40% | 66.7% |
| 50% | 100% |
| 60% | 150% |
To convert margin to markup: divide the margin by (1 − margin). To go the other way: divide the markup by (1 + markup). Our guide on margin versus markup works through the conversion in both directions with examples.
Worked examples
Cost $60, price $100. Profit is $40. Margin is 40 ÷ 100 = 40%. Markup is 40 ÷ 60 = 66.7%.
Cost $18, price $24. Profit is $6. Margin is 6 ÷ 24 = 25%. Markup is 6 ÷ 18 = 33.3%.
Pricing to a target margin. If you want a 40% margin on a $60 cost, you do not add 40% to the cost — that gives $84 and a 28.6% margin. Divide instead: 60 ÷ (1 − 0.4) = 60 ÷ 0.6 = $100. This division is the single most useful formula on this page.
Where people go wrong
Adding the target margin to the cost. As above: it produces a price that misses the target every time, and the shortfall grows as the target rises. At a 50% target you would price at $90 instead of $120.
Assuming a discount reduces margin one-for-one. A 10% discount on a 40% margin product does not leave a 30% margin. On the $100 item above, a 10% discount gives $90 of revenue against $60 of cost, so $30 profit on $90 — a 33.3% margin. A 30% discount leaves $70 revenue, $10 profit, and a 14.3% margin. Discounts eat margin far faster than their headline rate, because the cost does not move. The discount calculator is worth running alongside this one before you advertise anything.
Confusing gross margin with net margin. This calculator gives gross margin — price minus the direct cost of the item. Net margin subtracts everything else too: overheads, wages, rent, tax. A healthy gross margin can still produce a net loss, and businesses fail in exactly that gap.
Comparing margins across industries. A 40% margin is thin for software and exceptional for grocery retail. Margin is only meaningful against a relevant benchmark.
Ignoring the fees that come off the top. Payment processing, marketplace commission and shipping all reduce the effective price. If a platform takes 15%, your $100 sale is really $85 of revenue, and the 40% margin is closer to 29%.
Margins over 100%
A margin cannot exceed 100%, because profit cannot be more than the whole selling price — the best possible case is a cost of zero, giving exactly 100%. Markup has no such ceiling: an item costing $1 and selling for $50 carries a 4,900% markup and a 98% margin. If a calculation hands you a margin above 100%, the cost and price have been entered the wrong way round.