Margin vs. markup: what's the difference
These two numbers are calculated from the same profit figure but use different denominators, which is why they're so often confused. Margin is profit divided by the selling price — it tells you what percentage of each sale is profit. Markup is profit divided by the cost — it tells you how much you added on top of what the item cost you. For the same profit amount, markup is always a larger percentage than margin.
Setting the right price
- Decide your target margin first, then work backward to the price you need to charge, rather than guessing a markup and hoping the margin works out
- Watch out for thin margins that look fine per-unit but don't cover fixed costs like rent, salaries, or overhead at your actual sales volume
- Compare your margin against typical benchmarks for your industry — margin expectations vary hugely between, say, retail and software
Frequently asked questions
For the same profit, is margin or markup bigger?
Markup is always bigger, because it's calculated against the smaller cost figure rather than the larger selling price. For example, a $20 profit on a $40 cost is a 50% markup but only a 33% margin on the $60 selling price.
How do I set a price if I know my target margin?
Divide your cost by (1 − target margin as a decimal). For example, to hit a 25% margin on a $40 cost: 40 ÷ (1 − 0.25) = $53.33 selling price.
Does margin account for operating expenses?
Not by itself — the margin shown here is gross margin, based only on cost of goods versus selling price. Rent, salaries, marketing, and other overhead still need to come out of that margin before you see actual net profit.