finance
Margin vs Markup: Why a 50% Markup Is Only a 33% Margin
Margin divides profit by price, markup divides it by cost. The conversion table, how to price from a target margin, and why discounts eat margin faster than you think.
You buy a product for $40, sell it for $60, and tell your accountant you run a 50% margin. You don’t. You run a 50% markup, which is a 33.33% margin, because margin and markup take the same $20 of profit and divide it by different numbers. Markup divides by what you paid. Margin divides by what the customer paid. Mix them up when you set prices and you earn less on every sale than you planned, and nothing on the receipt will tell you.
Below: the two formulas, a conversion table, the correct way to price from a target margin, why margin can never reach 100% while markup has no ceiling, and what a discount really does to a margin. Every number comes from the same code as our profit margin and markup calculator, which solves for the rest once you enter any two of cost, price, profit, margin and markup.
Two formulas, one profit
Per unit:
profit = price − cost
margin % = profit ÷ price × 100 (the share of the selling price you keep)
markup % = profit ÷ cost × 100 (how much you added on top of cost)For the $40 / $60 item, profit is $20. Divide by the $60 price and you get a 33.33% margin. Divide by the $40 cost and you get a 50% markup. As long as the sale makes a profit, markup is the bigger number of the two, because cost is smaller than price, so you are dividing the same profit by less.
You can convert straight from one to the other without any dollar amounts. Write the percentages as fractions:
margin = markup ÷ (1 + markup)
markup = margin ÷ (1 − margin)So 0.5 ÷ 1.5 = 0.3333. That’s the whole headline.
The conversion table
These rows come from the reference table built into our calculator’s lib (CONVERSION_TABLE), which runs every markup through markup ÷ (1 + markup):
| Markup | Margin |
|---|---|
| 10% | 9.09% |
| 15% | 13.04% |
| 20% | 16.67% |
| 25% | 20% |
| 30% | 23.08% |
| 40% | 28.57% |
| 50% | 33.33% |
| 60% | 37.5% |
| 75% | 42.86% |
| 100% | 50% |
| 150% | 60% |
| 200% | 66.67% |
And the other direction, margin to markup, from the lib’s marginToMarkup:
| Margin you want | Markup you need |
|---|---|
| 10% | 11.11% |
| 20% | 25% |
| 25% | 33.33% |
| 30% | 42.86% |
| 40% | 66.67% |
| 50% | 100% |
| 60% | 150% |
| 75% | 300% |
| 90% | 900% |
| 95% | 1,900% |
| 99% | 9,900% |
At low percentages the two numbers barely differ (a 10% markup is a 9.09% margin), which is how people get away with treating them as the same. Above about 30% they pull apart quickly, and past a 50% margin the markup you need grows faster and faster. That’s the asymptote in the next section.
Pricing from a target margin: divide, don’t add
Say you want a 25% margin on a $40 item. The tempting move is to add 25% to the cost: $40 × 1.25 = $50. But that’s a 25% markup. The $10 profit divided by the $50 price is a 20% margin, five points short of your target.
The correct formula divides the cost by whatever share of the price is left over for cost:
price = cost ÷ (1 − margin)
= $40 ÷ 0.75
= $53.33Check it: $53.33 − $40 = $13.33 profit, and $13.33 ÷ $53.33 = 25%. In our calculator that’s the “Cost & margin” option, and the “How:” line under the result shows the division it did.
The gap between the right price and the “add the margin to cost” price grows quickly. For the same $40 cost:
| Target margin | Correct price (cost ÷ (1 − m)) | Cost + m% | Margin you actually get |
|---|---|---|---|
| 20% | $50.00 | $48.00 | 16.67% |
| 25% | $53.33 | $50.00 | 20% |
| 30% | $57.14 | $52.00 | 23.08% |
| 40% | $66.67 | $56.00 | 28.57% |
| 50% | $80.00 | $60.00 | 33.33% |
| 60% | $100.00 | $64.00 | 37.5% |
| 75% | $160.00 | $70.00 | 42.86% |
The 50% row is the expensive one. Aim for a 50% margin but apply a 50% markup and you charge $60 instead of $80, making $20 a unit instead of $40. That’s half the profit you planned on every sale. Notice also that the last column can never reach 50%. Adding m% to the cost gives a margin of m ÷ (1 + m), and that stays under 50% for any m below 100%.
If your supplier or industry talks in markups, use the “Cost & markup” option instead. It computes cost × (1 + markup). Both are right, provided you know which one you’re holding.
Why margin stops before 100% and markup doesn’t
Margin is profit divided by price, and profit is price minus cost. For margin to hit 100%, profit must equal the whole price, so cost must be zero. Push the target margin toward 100% and the required price runs away:
| Target margin on a $40 cost | Price needed |
|---|---|
| 90% | $400 |
| 99% | $4,000 |
| 99.99% | $400,000 |
Our calculator follows that strictly. Enter a margin of 100% or more and it refuses with “Margin must be below 100% — a 100% margin would mean the item cost nothing.” The one place you will see exactly 100% is when you enter a cost of $0 with a price. It then reports a 100% margin and shows markup as ”—”, because markup with a zero cost means dividing by zero.
Markup has no ceiling at all. A $5 item sold for $50 has a 900% markup and a 90% margin. The floor is the other way round. Markup can’t drop to −100% or lower (that would make the price zero or negative), and the calculator rejects it. Margin, though, can go as negative as you like if you sell far enough below cost.
Losses are allowed in both directions. Our calculator shows a $50 item sold for $40 as −$10 profit, a −25% margin and a −20% markup, and the “Profit” field takes a negative number if you want to start from a known loss. If you give it a profit and a margin with opposite signs (a positive profit with a negative margin), it says that can’t happen instead of making up an answer.
One pair it won’t solve is margin and markup together. They describe the same ratio from two sides, so knowing both still pins down no dollar amount. The dropdown leaves that combination out.
Gross or net: what this number actually is
The margin in this post, and in our tool, is gross and per unit: selling price against the direct cost of the item. The SEC’s Beginners’ Guide to Financial Statements describes the same idea at company scale. Subtract the “costs of sales” from net revenues to get “gross profit” (or sometimes “gross margin”), which is “gross” because “there are certain expenses that haven’t been deducted from it yet.” Those are the operating expenses that “cannot be linked directly to the production of the products or services being sold.” Take them off and you get income from operations; take off interest and tax as well and you reach net income, the bottom line.
So our calculator does not know about your rent, your ad spend, shipping, payment-processing fees or taxes, and it isn’t trying to. It’s for setting a unit price and comparing products. A healthy gross margin on every SKU can still add up to a net loss if fixed costs eat it, so look at the business as a whole using your actual accounts, not one product. (We also deliberately don’t model marketplace fees, since those vary by platform and change often.)
Discounts eat margin faster than you think
Here’s where the difference between markup and margin really bites. A discount comes off the price, but your cost doesn’t move, so the whole discount comes out of profit.
Take the $40 / $60 item again (33.33% margin) and run each sale price through the calculator:
| Discount | Sale price | Profit | Margin | Profit lost | Extra units needed to earn the same profit |
|---|---|---|---|---|---|
| 0% | $60.00 | $20.00 | 33.33% | — | — |
| 5% | $57.00 | $17.00 | 29.82% | 15% | +17.6% |
| 10% | $54.00 | $14.00 | 25.93% | 30% | +42.9% |
| 15% | $51.00 | $11.00 | 21.57% | 45% | +81.8% |
| 20% | $48.00 | $8.00 | 16.67% | 60% | +150% |
| 25% | $45.00 | $5.00 | 11.11% | 75% | +300% |
| 30% | $42.00 | $2.00 | 4.76% | 90% | +900% |
A 10% discount takes 30% of your profit per unit, and you’d need to sell almost 43% more units just to end up where you started. At 33.33% off you are selling at cost.
You don’t need the table to see why. If m is your margin and d is the discount (both as fractions), the price P becomes P(1 − d) while the cost stays at P(1 − m), so:
new profit = P × (m − d)
share of profit lost = d ÷ m
extra volume needed = d ÷ (m − d)
new margin = (m − d) ÷ (1 − d)The thinner your margin, the more each point of discount hurts. The same 20% off on a product with a 50% margin ($40 cost, $80 price) leaves a $24 profit and a 37.5% margin. You lose 40% of the profit instead of 60%, and need 66.7% more units instead of 150%.
Stacked promotions make it worse, though the percentages don’t add up the way people expect. “20% off, then an extra 10%” is 28% off, not 30%: 0.8 × 0.9 = 0.72 of the price. On the $80 item that’s a sale price of $57.60, a $17.60 profit and a 30.56% margin. Our discount calculator works out stacked and fixed-amount discounts. Paste its sale price into the profit margin calculator as “Cost & price” to see what’s left. The same “a percent of a percent isn’t a simple sum” trap shows up in reporting too, which we covered in percentage points vs percent change.
A short pricing checklist
- Know which number you’re quoting. If it’s profit over price, call it margin; if it’s profit over cost, call it markup. Put the word on every spreadsheet column.
- Price from a target margin by dividing:
cost ÷ (1 − margin). Nevercost × (1 + margin). - Before you run a sale, work out
d ÷ m. That’s the share of your per-unit profit the discount takes away. If it’s over half, you need a reason. - Remember it’s gross. Fees, shipping, overhead and tax all come out later.
To run your own numbers, open the profit margin calculator, pick the two values you know and read off the other three, along with the formula it used. Everything runs in your browser, and the island makes no network requests. For the other steps around a price there’s the sales tax calculator for the register, the percentage calculator for any other percent question, and the invoice generator when it’s time to bill someone.