Markup vs margin: why the same profit gives different percentages
Markup and margin both describe profit as a percentage. They're not the same percentage, and mixing them up is one of the fastest ways to under-price a product.
The two formulas
Markup % = (price − cost) ÷ cost × 100 Margin % = (price − cost) ÷ price × 100
Same numerator — profit — different denominator. Markup divides by cost. Margin divides by selling price. Because selling price is always higher than cost (assuming you're profitable), margin will always be a smaller percentage than markup on the same dollar profit.
A worked comparison
Take a product that costs $80 to make, sold for $100. Profit is $20 either way.
- Markup = $20 ÷ $80 = 25%
- Margin = $20 ÷ $100 = 20%
Same $20 profit, two different percentages, five points apart. At higher markup percentages the gap widens further — a 100% markup is only a 50% margin, and a 300% markup is only a 75% margin.
Why this causes pricing mistakes
The mistake usually happens in reverse: someone wants a 30% margin, so they add 30% to their cost — which actually produces a 30% markup and something closer to a 23% margin. To hit an exact target margin, divide cost by (1 − target margin) instead of multiplying cost by (1 + target margin). For a $70 cost and a 30% margin target: $70 ÷ (1 − 0.30) = $100 selling price — not $70 × 1.30 = $91.
Which one should you use?
Retail and manufacturing businesses commonly think in margin, since it ties directly to revenue and is easier to compare against overhead as a percentage of sales. Markup is often easier to calculate quickly at the point of pricing a single item, since it starts from a cost you already know. Neither is "more correct" — just be explicit about which one you're quoting, especially when comparing pricing across a team.