"We use a 40% markup." "Our margin is 40%." They sound similar, but they produce different prices, and confusing them is one of the most common pricing mistakes in small businesses. Here's the difference, the formulas and a quick conversion table.
Definitions
- Markup is profit as a percentage of cost.
- Margin (gross margin) is profit as a percentage of selling price.
Both start with the same profit: Price − Cost. They just divide by different things.
Formulas
- Profit = Price − Cost
- Markup % = Profit ÷ Cost
- Margin % = Profit ÷ Price
To set a price:
- From a target markup: Price = Cost × (1 + Markup)
- From a target margin: Price = Cost ÷ (1 − Margin)
Worked example: a product that costs $12
Target 40% markup:
- Price = $12 × 1.40 = $16.80
- Profit = $4.80
- Margin = 4.80 ÷ 16.80 = 28.6%
Target 40% margin:
- Price = $12 ÷ (1 − 0.40) = $20.00
- Profit = $8.00
- Markup = 8.00 ÷ 12.00 = 66.7%
Same "40%", but the price differs by $3.20 and the profit per unit nearly doubles. If your plan assumed a 40% margin but you priced with a 40% markup, every sale earns much less than the plan.
Check any price, cost, margin or markup in the free profit margin & markup calculator.
Conversion formulas
- Margin = Markup ÷ (1 + Markup)
- Markup = Margin ÷ (1 − Margin)
Conversion table
| Markup | Margin |
|---|---|
| 10% | 9.1% |
| 25% | 20.0% |
| 33.3% | 25.0% |
| 50% | 33.3% |
| 66.7% | 40.0% |
| 100% | 50.0% |
| 150% | 60.0% |
| 200% | 66.7% |
| 300% | 75.0% |
Two useful anchors: a 100% markup is a 50% margin ("doubling the cost"), and margin can never reach 100%, while markup has no upper limit.
Why margin is usually the better pricing language
- Your costs come out of revenue. Rent, salaries, ads and fees are paid from revenue, so it helps to know what share of each sale is left after the product cost. That's margin.
- Financial statements use margin. Gross margin on a P&L is profit ÷ revenue.
- Discounts are applied to price. A 20% discount comes off the price, so margin shows its impact directly. On the $20 product above (40% margin), a 20% discount brings the price to $16 and the margin to 25%: half the profit is gone from a "20%" discount.
Markup is still handy for quick pricing at the counter ("cost × 2"), and many retail and trade businesses quote it. Just know which one you're using.
Include all per-unit costs
"Cost" should mean everything that goes into one sale, not just materials:
- materials or wholesale cost
- packaging and labels
- per-unit labor, if it's paid per item
- payment processing and marketplace fees (often 10%+ on platforms, see how much Etsy fees take)
- shipping you pay and don't pass on
A healthy-looking margin on materials alone can turn thin once fees and packaging are included.
From margin to break-even
Your margin per unit (the contribution margin, once all variable costs are included) decides how many units you need to cover fixed costs. With a $20 price and $12 cost, each sale contributes $8, so $4,000 of monthly fixed costs needs 500 sales. Learn the full method in this break-even analysis example.
Frequently asked questions
Is gross margin the same as net margin? No. Gross margin uses only the cost of the product. Net margin subtracts all costs, including rent, salaries, marketing and taxes, and is always lower.
What margin should I target? It varies widely by industry, channel and business model. Work backwards from your fixed costs and desired profit with break-even analysis, and compare with what customers will pay, rather than copying someone else's percentage.
Why does my supplier talk about markup and my accountant about margin? Markup is convenient when you start from cost (wholesale and trade pricing). Margin is how revenue and profit show up in financial statements. Both are fine, as long as you convert correctly.
Can markup be more than 100%? Yes. A product that costs $5 and sells for $20 has a 300% markup and a 75% margin. Margin can approach but never reach 100%.
Key takeaways
- Markup = profit ÷ cost; margin = profit ÷ price.
- Price for a target margin with Cost ÷ (1 − Margin).
- A 100% markup is a 50% margin; margin can never reach 100%.
- Include fees and packaging in cost before you price.
One more practical tip: when a supplier raises your cost, keep the margin constant, not the price difference. If cost rises from $12 to $13.50 and you want to keep a 40% margin, the new price is $13.50 ÷ 0.60 = $22.50. Adding only the $1.50 cost increase ($21.50) would quietly drop your margin to about 37%.
A pricing checklist
- List full per-unit cost (materials + packaging + fees + shipping you absorb).
- Choose a target margin for the product category.
- Price = Cost ÷ (1 − Margin), then round to a sensible price point.
- Check the price against competitors and what customers will pay.
- Recalculate when costs change.
Doing this for one product takes minutes. Keeping prices right across a whole catalog as supplier costs move is where a spreadsheet helps. The Product Cost & Break-even Calculator template costs every product, prices by target margin and shows break-even units for the catalog.