Profit margin vs markup
Margin and markup use the same profit figure but compare it to different numbers. Margin is profit as a share of the selling price. Markup is profit as a share of your cost. Mixing them up is one of the most common pricing mistakes.
Margin = (Price − Cost) ÷ Price × 100
Markup = (Price − Cost) ÷ Cost × 100
Example
If a product costs you $40 and sells for $65, your profit is $25. The margin is 38.5% ($25 ÷ $65) and the markup is 62.5% ($25 ÷ $40).
Finding the price for a target margin
Price = Cost ÷ (1 − Target margin)
To earn a 35% margin on a $40 item, charge $40 ÷ 0.65 = $61.54. Adding 35% to the cost ($54) would only give you a 25.9% margin.
Margin to markup conversion
| Margin | Markup needed |
|---|---|
| 20% | 25% |
| 25% | 33.3% |
| 30% | 42.9% |
| 40% | 66.7% |
| 50% | 100% |
Common questions
What is a good profit margin?
It varies widely by industry. Retail and restaurants often run on single-digit net margins, while software and services can exceed 20%. Compare against businesses like yours.
What's the difference between gross and net profit margin?
Gross margin subtracts only the direct cost of the product. Net margin subtracts all expenses, including rent, salaries, marketing and taxes.
How do I convert markup to margin?
Margin = Markup ÷ (1 + Markup). A 50% markup equals a 33.3% margin.
Can a margin be over 100%?
No. Margin is a share of the selling price, so it can approach but never reach 100%. Markup, however, can be any size.
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