Margin vs markup: formulas, conversion table and examples

Gross margin is profit as a share of the selling price: (price − cost) ÷ price × 100. Markup is the same profit as a share of the cost: (price − cost) ÷ cost × 100. A product that costs €70 and sells for €100 has a 30% margin and a 42.9% markup: the same €30 profit, measured against a different base.

Margin % = (price − cost) ÷ price × 100

Markup % = (price − cost) ÷ cost × 100

Margin vs markup: what is the difference?

Both start from the same number, the gross profit per unit: the net selling price minus what the product cost you. Margin divides that profit by the price, markup divides it by the cost. As long as you sell above cost, the cost is smaller than the price, so the markup percentage is always higher than the margin percentage for the same product.

Buyers and shop owners often think in markup because they start from a purchase price. Accountants and reports think in margin because it relates profit to revenue. Neither is wrong; the trouble starts when one person says “30%” meaning margin and another hears markup.

Some trades use a multiplier instead: price ÷ cost. In the example above it is 100 ÷ 70 = 1.43. A multiplier of 2 means a 100% markup and a 50% margin.

How to convert markup to margin and back

Write the percentages as decimals (30% = 0.30) and use these four formulas:

• Markup = margin ÷ (1 − margin)
• Margin = markup ÷ (1 + markup)
• Price from a target margin = cost ÷ (1 − margin)
• Price from a markup = cost × (1 + markup)

Example: a 30% margin is 0.30 ÷ 0.70 = 0.429, a 42.9% markup. A 50% markup is 0.50 ÷ 1.50 = 0.333, a 33.3% margin.

Margin to markup conversion table

The gap widens as margins grow. At 10% the two numbers are almost the same; at 50% the markup is double the margin.

Common markups and the margin they give

How to price a product from its cost

Pricing from cost works best when you start from the margin you need and convert it into a price, rather than adding a percentage out of habit.

1. 1Work out the full unit cost. Take the purchase price and add freight, insurance, customs duties and the other costs of getting the goods into your warehouse. For services and products you make yourself, add labour.
2. 2Choose the margin you need. It has to pay for rent, salaries, marketing and the rest of your overheads, and still leave a profit.
3. 3Calculate the price: cost ÷ (1 − target margin). For a €70 cost and a 30% target: 70 ÷ 0.70 = €100.
4. 4Compare it with the market. If similar products sell well below your price, look at your cost or your positioning before you quietly accept a lower margin.
5. 5Round and recheck. If you round €100 down to €99.90, the margin becomes €29.90 ÷ €99.90 = 29.9%. Always recalculate on the final price.

The classic mistake: a 30% markup when you wanted a 30% margin

You want a 30% margin on a chair with a €70 cost. Someone in the team simply adds 30% to the cost:

The mistake costs €9 on every chair, which is 30% of the profit you planned. On 1,000 chairs that is €9,000 of gross profit you never see, and because the price still looks competitive, nobody notices.

Calculate on net prices and the real cost

Use prices without VAT

Margins are calculated on net prices, excluding VAT or sales tax. The tax you charge on a sale is not your revenue; you collect it and pass it on. If a price includes VAT, convert it first: net price = gross price ÷ (1 + VAT rate). The cost goes in net as well when your business can deduct the VAT it pays on purchases; if it cannot, that VAT is part of your cost. Rates and deduction rules differ by country, so check them with your accountant. The basics are in our VAT guide.

Include landed costs

The supplier's invoice price is rarely your real cost. Add everything you pay to get the goods into your warehouse: freight, insurance, customs duties, customs broker fees and similar charges.

If you priced the chair at €100 from the €60 invoice price, you would believe your margin is 40%. It is really 30%. When one shipment carries several products, split the extra costs by value, weight, volume or quantity, whichever best reflects what drove them. And when the same item arrives at different costs over time, your costing method decides which cost goes into each sale; see FIFO vs weighted average.

Services and production: count the hours

For a service, the main cost is labour. Price a job from the hours it takes multiplied by the full hourly cost of the person doing it, plus materials. Example: 3 hours at €25 an hour plus €45 of materials gives a €120 cost. Sold at €200 net, the job has a 40% margin and a 66.7% markup. For products you make, build the unit cost from the bill of materials: raw materials, expected waste, labour and overhead.

How discounts eat your margin

A discount comes straight out of your profit, while the cost stays the same. Take the chair again: €70 cost, €100 price, 30% margin. A 10% discount cuts the price to €90, but the profit per chair falls from €30 to €20, a third less. To earn the same gross profit you have to sell 50% more units: 150 chairs at €20 instead of 100 chairs at €30, €3,000 either way.

The rule behind the table: extra volume needed = discount ÷ (margin − discount). The thinner the margin, the faster a discount becomes impossible to win back, and at a 30% discount this chair sells at cost. Before you agree to a discount, check what it does to the margin of that order or that customer, not only to the price.

Gross margin vs net margin, and where to measure it

Gross margin compares revenue with the cost of the goods or services sold. Net margin compares revenue with what is left after every expense: rent, salaries, marketing, financing and taxes. A business can have a healthy gross margin and still lose money if its overheads are too high, so the gross margin you set on products has to leave room for them.

Margin by product, category and customer

An average margin hides the details. Break it down:

• By product, to find items that sell well but earn little.
• By category, to see which part of your range pays for the rest.
• By customer, because special prices and discounts can make a large customer far less profitable than it looks.

When supplier prices change

A supplier's price increase shrinks your margin the day it arrives, even if nobody touches your price list. If the chair's landed cost rises from €70 to €77, the margin at €100 falls to 23%. To keep 30%, the new price is 77 ÷ 0.70 = €110. With FIFO, older stock bought at €70 is sold first, so your reports show the change later than your price list should react to it. Review prices whenever a cost changes, and the rest of the range on a fixed schedule, for example every quarter.

Common mistakes

1. 1Mixing up margin and markup. Agree which one your team quotes, and always say “margin” or “markup”, never just “30%”.
2. 2Calculating on prices with VAT. Revenue and cost both go in net.
3. 3Using the supplier's invoice price as the cost. Freight, insurance and customs duties belong in the cost.
4. 4Forgetting labour. Hours spent on a service or in production are a cost, even when no invoice arrives for them.
5. 5Giving discounts without checking the margin. On a 30% margin product, a 10% discount takes a third of the profit.
6. 6One margin for everything. Products, categories and customers carry different costs and risks.
7. 7Never updating prices. Supplier price increases erode the margin until you recalculate.

How Clientlly helps

In Clientlly every product has a cost price and a selling price, and stock is valued at cost with FIFO cost layers. Landed costs such as freight, insurance, broker fees and customs duties are added to the cost of the goods received and allocated by value, weight, volume or quantity, so your margins start from the real cost. Reports on stock margins and profitability, and on inventory valuation and margins, show which products earn and which do not. For products you make, recipes and bills of materials calculate waste, labour, overhead, unit cost and a target margin, and each production run refreshes the product cost and, if you choose, the sale price. See the inventory and warehousing module.