Profit Margin vs Markup: The Difference That Trips People Up

Margin and markup both describe profit, but they compare that profit with different numbers. This is why two people can talk about “40 percent” and arrive at completely different prices.

Start with one example

Suppose a product costs $60 and sells for $100. Gross profit is $40.

Margin uses revenue as the denominator

margin = profit ÷ selling price × 100

40 ÷ 100 × 100 = 40%

Markup uses cost as the denominator

markup = profit ÷ cost × 100

40 ÷ 60 × 100 = 66.67%

The same transaction therefore has a 40% margin and a 66.67% markup.

Why a 50% markup is not a 50% margin

A $100 cost with a 50% markup gives a $150 selling price and $50 profit. The margin is 50 ÷ 150 = 33.33%.

Calculate a selling price from a target margin

To achieve a target margin:

selling price = cost ÷ (1 − target margin)

For a $60 cost and 40% target margin: 60 ÷ 0.60 = 100.

Calculate a selling price from markup

selling price = cost × (1 + markup)

A $60 cost with 40% markup becomes $84. That price produces a 28.57% margin.

Include the right costs

Gross margin can look healthy while the business still loses money if the “cost” entered excludes meaningful expenses such as labour, fulfillment, payment fees, returns, freight, platform commissions, or overhead. Decide which costs the metric is supposed to represent.

When each metric is useful

Markup is intuitive when starting with a known unit cost and adding a pricing factor. Margin is useful when evaluating how much of sales revenue remains after the costs included in the calculation. Many financial reports use margin, while many pricing workflows begin with markup.