Markup vs Margin: What's the Difference?
Markup and margin both measure profit but are calculated differently. Confusing them leads to pricing errors. This guide explains the difference with formulas and examples.
Markup and margin are both ways of expressing profit, but they use different bases for calculation. Markup is calculated on cost; margin is calculated on revenue. Mixing them up is one of the most common pricing mistakes in business.
Markup vs Margin: The Definitions
Markup is the amount added to the cost of a product or service to arrive at the selling price. It is expressed as a percentage of the cost.
Formula
Markup % = (Selling Price − Cost) ÷ Cost × 100
Example
If a product costs £40 to make and you sell it for £60, the markup is (£60 − £40) ÷ £40 × 100 = 50%.
Gross margin (or profit margin) is the profit expressed as a percentage of the selling price (revenue). It tells you what percentage of each pound of revenue is profit.
Formula
Margin % = (Selling Price − Cost) ÷ Selling Price × 100
Example
If a product costs £40 to make and you sell it for £60, the margin is (£60 − £40) ÷ £60 × 100 = 33.3%.
Key Differences
- 1Markup uses cost as the base; margin uses selling price as the base
- 2The same £20 profit gives a 50% markup but only a 33.3% margin on a £40 cost / £60 selling price
- 3Markup is always higher than margin for the same transaction (when there is a profit)
- 4Accountants typically report margin; buyers and manufacturers often think in markup
When to Use Markup vs Margin
Use markup when pricing products from a cost base. Use margin when reporting financial performance or comparing profitability across your range. Many businesses use both: markup to set prices, margin to measure health.
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Common Mistakes to Avoid
Applying a 50% markup and expecting a 50% margin, a 50% markup gives only a 33.3% margin
Using margin percentage to calculate selling price when markup percentage was intended (and vice versa)
Confusing gross margin with net margin, gross margin only accounts for cost of goods sold, not operating expenses
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Frequently Asked Questions
Is markup or margin higher?↓
Markup is always higher than margin for the same transaction (assuming profit). A 50% markup equals a 33.3% margin. This is because markup uses the smaller cost base, while margin uses the larger selling price base.
How do I convert markup to margin?↓
Use this formula: Margin = Markup ÷ (1 + Markup). So a 50% (0.5) markup gives a margin of 0.5 ÷ 1.5 = 33.3%.
How do I convert margin to markup?↓
Use this formula: Markup = Margin ÷ (1 − Margin). So a 33.3% (0.333) margin gives a markup of 0.333 ÷ 0.667 = 50%.
What is a good markup percentage?↓
It depends on your industry. Retail typically uses 50–100% markup (keystone pricing = 100%). Restaurants use 200–500%. Software and services can use much higher markups because the marginal cost of delivery is near zero.
What is a good profit margin?↓
For product businesses, 20–40% gross margin is typical. SaaS companies often achieve 70–80% gross margin. Services businesses often run 30–60% gross margin. Net margin (after all expenses) is typically much lower.