Margin and markup both describe the profit on a sale, but they measure it against different things. Markup is profit as a percentage of cost. Margin is profit as a percentage of the selling price. Because price is always bigger than cost, the margin is always the smaller number.
Mixing them up is one of the most common pricing mistakes in small businesses. An owner who wants a 50% margin and adds a 50% markup ends up with a 33% margin and wonders where the profit went.
Markup = (price − cost) ÷ cost
Margin = (price − cost) ÷ price
To convert between them:
Margin = markup ÷ (1 + markup)
Markup = margin ÷ (1 − margin)
Price for a target margin = cost ÷ (1 − margin)
An item costs £60.
| Markup | Margin |
|---|---|
| 10% | 9.1% |
| 20% | 16.7% |
| 25% | 20.0% |
| 33.3% | 25.0% |
| 50% | 33.3% |
| 66.7% | 40.0% |
| 100% | 50.0% |
| 150% | 60.0% |
| 200% | 66.7% |
A margin can never reach 100%, however high the markup, because that would mean the item cost nothing.
Use whichever you like, but be consistent. Markup is easier when pricing from cost: take the cost and multiply. Margin is better for checking whether the business makes enough, because your accounts show gross margin, and overheads are paid from sales.
A practical approach is to set a target gross margin from your accounts, then convert it to the markup your team uses when quoting. Write the conversion on the price list so nobody has to work it out.
Work out both margin and markup on prices and costs excluding VAT. Including VAT in one and not the other distorts both figures.
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