Two sellers buy the same item for 60. One prices it at 100 and says, “That is a 66.7% markup.” The other looks at the same numbers and says, “That is a 40% margin.” Both statements are correct. They are describing different ratios, and confusing them is one of the fastest ways to misprice a product.
This guide separates markup from margin, shows the conversion formulas, and works through target pricing and discount damage. Keep the profit margin calculator nearby if you want to test your own cost and price.
What markup and margin each measure
Profit is the same number in both calculations: selling price minus cost. What changes is the denominator. Margin divides profit by revenue, while markup divides profit by cost.
Margin answers a simple question: of every rupee or dollar that comes in, how much is left after the direct cost of the item? A 40% margin means 40% of the selling price is gross profit and 60% covers the cost. It is the ratio retailers usually quote when they talk about the health of a product line.
Markup answers a different question: how much was added on top of the cost? A 66.7% markup means the price is 1.667 times the cost. It is the ratio a contractor or wholesaler often uses when building a quote from a cost sheet.
Neither ratio is more honest. They are two views of the same transaction. The trouble starts when someone sets a price using markup and then reports the result as margin, or when a target margin gets translated into the wrong multiplier. A 50% markup does not produce a 50% margin; it produces a 33.3% margin.
The formulas, side by side
Let profit equal price minus cost. Then:
- Margin % = (Profit ÷ Price) × 100
- Markup % = (Profit ÷ Cost) × 100
- Price from margin = Cost ÷ (1 − Margin)
- Price from markup = Cost × (1 + Markup)
To convert one ratio into the other, use the relationship between price and cost. Since price = cost + profit, markup is profit divided by cost, and margin is profit divided by (cost + profit). A 66.67% markup becomes 66.67 ÷ 166.67 = 40% margin. A 40% margin becomes 40 ÷ 60 = 66.67% markup.
The general conversions are Margin = Markup ÷ (1 + Markup) and Markup = Margin ÷ (1 − Margin), with both rates written as decimals. These are worth memorizing if you move between a cost sheet and a price list. They save you from guessing which multiplier the other person used.
| Cost | Price | Profit | Margin | Markup |
|---|---|---|---|---|
| 60 | 100 | 40 | 40% | 66.67% |
| 60 | 90 | 30 | 33.33% | 50% |
| 45 | 75 | 30 | 40% | 66.67% |
| 80 | 120 | 40 | 33.33% | 50% |
| 80 | 160 | 80 | 50% | 100% |
Worked examples with the arithmetic shown
Example 1: Cost 60, price 100. Profit = 100 − 60 = 40. Margin = 40 ÷ 100 × 100 = 40%. Markup = 40 ÷ 60 × 100 = 66.67%. The price is 1.667 times the cost, and 40% of the price is profit.
Example 2: Cost 45, price 75. Profit = 75 − 45 = 30. Margin = 30 ÷ 75 × 100 = 40%. Markup = 30 ÷ 45 × 100 = 66.67%. Different cost and price, same ratios, because both numbers moved by the same proportion. This is a useful check: if cost and price both double, margin and markup stay the same even though the absolute profit doubles.
Example 3: A 30% discount on the 60-cost, 100-price item. The new price is 70. Profit falls to 70 − 60 = 10. Margin is 10 ÷ 70 × 100 = 14.29%. Markup is 10 ÷ 60 × 100 = 16.67%. A discount that looks like 30% of the price removed 75% of the profit and 64.3% of the original margin in relative terms. This is why discounting a low-margin item is dangerous: the price can still look healthy while the profit nearly disappears.
Example 4: Cost 80, target margin 50%. Price = 80 ÷ (1 − 0.50) = 160. Profit = 80, markup = 80 ÷ 80 = 100%. If you had used a 50% markup instead, the price would be 80 × 1.50 = 120, with a profit of 40 and a margin of 33.33%. The same “50%” label produces two very different prices.
Pricing from a target margin
Most pricing decisions start with a margin target, not a markup target. A business wants to keep a certain share of revenue after direct costs, then work backward to a price. The formula is price = cost ÷ (1 − margin). The subtraction is important: a 40% margin means cost is 60% of price, so dividing cost by 0.60 gives the price.
If the cost is 60 and the target margin is 40%, the price is 60 ÷ 0.60 = 100. If the target is 50%, the price is 60 ÷ 0.50 = 120. If the target is 25%, the price is 60 ÷ 0.75 = 80. Notice how quickly the required price rises as the target margin approaches 100%. A 90% margin target would require 60 ÷ 0.10 = 600, which may be impossible in a competitive market.
To go the other way, from a target markup, multiply cost by 1.5 for a 50% markup: 60 × 1.50 = 90. The resulting margin is 30 ÷ 90 = 33.33%. A 100% markup gives 120 and a 50% margin. The markup number will always be larger than the margin number for a profitable sale, and the gap widens as the rates rise.
Use the same basis for every product in a comparison. If one spreadsheet column is margin and another is markup, the totals will not reconcile. Label the column, state the formula in the header, and convert before ranking products. The GST calculator can help separate tax from revenue if your prices include GST, since margin should be calculated on the tax-exclusive selling price. This is general information, not financial advice.
Why discounts hit margin harder than they look
Discounts reduce revenue, but cost stays the same. That leverage makes margin fall faster than price. Take the 60-cost item at 100 with a 40% margin. A 10% discount lowers the price to 90, profit to 30, and margin to 33.33%. The price fell 10%, but profit fell 25% and margin fell 6.67 percentage points.
At a 20% discount, the price is 80, profit is 20, and margin is 25%. Profit has halved. At 30% off, the price is 70, profit is 10, and margin is 14.29%. At 40% off, the price equals the cost and profit is zero. Every additional point of discount removes a larger share of the remaining profit.
Volume has to compensate. After the 10% discount, the seller earns 30 per unit instead of 40. To keep the same total gross profit, they need 40 ÷ 30 = 1.333, or 33.3% more units. After the 20% discount, they need 40 ÷ 20 = 2, or twice the volume. Whether that volume is achievable depends on demand, capacity and the cost of acquiring more customers, which is why a discount should be modeled before it is launched.
This is the same arithmetic covered in the discount and sale price guide, viewed from the seller’s side. The customer sees the sale price; the seller needs to see the profit line. A promotion that raises revenue can still lower gross profit if the margin falls faster than volume rises.
Using the profit margin calculator
The profit margin calculator takes a unit cost and a selling price, then returns profit, margin and markup together. Seeing all three numbers side by side is the quickest way to catch a label error.
- Enter the fully loaded direct cost per unit: materials, labor and packaging. Leave overhead for a separate net-margin calculation.
- Enter the tax-exclusive selling price. If your price includes GST or sales tax, remove the tax first so the margin is not flattered by money you collect on behalf of the government.
- Read the profit, margin and markup. Check that the margin is profit ÷ price and the markup is profit ÷ cost.
- Change the price by a few units and watch the margin move. A small price change can produce a much larger percentage change in profit.
For a target-margin price, divide cost by one minus the target. For a target-markup price, add the markup rate to 1 and multiply by cost. Compare the two results before choosing a list price, and remember that discounts, payment fees, shipping and returns all come out of the gross margin afterward. The percentage calculator guide connects these pricing ratios to the broader formulas for change, tax and percentage points.