Profit Margin vs Markup: What's the Difference?
By the Calculator.hair team · Updated · 5 min read
Short answer
Profit margin is profit as a percentage of the selling price; markup is profit as a percentage of cost. An item that costs $60 and sells for $100 has a $40 profit, a 40% margin ($40 ÷ $100) and a 66.67% markup ($40 ÷ $60). The same profit always gives a markup higher than the margin, so the two numbers are not interchangeable.
Key takeaways
- Margin = (revenue - cost) ÷ revenue; markup = (revenue - cost) ÷ cost.
- Convert with margin = markup ÷ (1 + markup) and markup = margin ÷ (1 - margin).
- A 50% margin equals a 100% markup, and a 25% margin equals a 33.33% markup.
- A 40% markup on a $60 item gives only a 28.57% margin, a common pricing mistake.
- A 20% discount on a 40% margin item cuts profit per unit in half.
What is the difference between margin and markup?
Margin compares profit to the selling price; markup compares the same profit to the cost. Both start from the same dollar profit, so a business can state either one, but they answer different questions: margin tells you how much of each sales dollar you keep, and markup tells you how much you added on top of cost.
Because price is larger than cost whenever you make a profit, the markup percentage is always higher than the margin percentage. Margin can never reach 100%, since that would require a cost of zero, while markup has no upper limit.
Our margin calculator finds margin, markup, profit, cost and revenue from any two of those inputs.
| Margin | Markup | |
|---|---|---|
| Formula | Profit ÷ revenue | Profit ÷ cost |
| Base | Selling price | Cost |
| $60 cost, $100 price | 40% | 66.67% |
| Maximum | Below 100% | No limit |
| Typical use | Measuring profitability | Setting prices |
What is the profit margin formula?
Profit margin = (revenue - cost) ÷ revenue × 100. With a cost of $120 and revenue of $160, the profit is $40 and the margin is $40 ÷ $160 = 25%. Revenue here means the money from sales; cost means what you paid to make or buy what you sold.
You can rearrange the formula to solve for price, which is what most sellers need. To hit a target margin, divide the cost by (1 - margin). A $60 item at a 40% target margin must sell at $60 ÷ 0.60 = $100.
- Profit = revenue - cost
- Margin % = profit ÷ revenue × 100
- Markup % = profit ÷ cost × 100
- Price from margin = cost ÷ (1 - margin)
- Price from markup = cost × (1 + markup)
- Cost from margin = revenue × (1 - margin)
What is the gross margin formula?
Gross margin = (revenue - cost of goods sold) ÷ revenue × 100. Cost of goods sold (COGS) is the direct cost of the products or services sold, such as materials, inventory and direct labor. It excludes overhead like rent, marketing and office salaries.
Businesses usually look at three margins, each one further down the income statement. Using a sample company with $500,000 of revenue:
| Line | Amount | Margin | Formula |
|---|---|---|---|
| Revenue | $500,000 | ||
| Cost of goods sold | -$300,000 | ||
| Gross profit | $200,000 | 40% | Gross profit ÷ revenue |
| Operating expenses | -$120,000 | ||
| Operating income | $80,000 | 16% | Operating income ÷ revenue |
| Interest and taxes | -$20,000 | ||
| Net income | $60,000 | 12% | Net income ÷ revenue |
How do you convert markup to margin?
To convert markup to margin, divide the markup by 1 plus the markup. To convert margin to markup, divide the margin by 1 minus the margin. Use decimals in both formulas.
A 50% markup is 0.50 ÷ 1.50 = 33.33% margin. A 40% margin is 0.40 ÷ 0.60 = 66.67% markup. The table below comes from our margin calculator using a $100 cost, and it holds for any cost because both percentages are ratios.
| Margin | Markup | Price on $100 cost | Profit on $100 cost |
|---|---|---|---|
| 10% | 11.11% | $111.11 | $11.11 |
| 15% | 17.65% | $117.65 | $17.65 |
| 20% | 25.00% | $125.00 | $25.00 |
| 25% | 33.33% | $133.33 | $33.33 |
| 30% | 42.86% | $142.86 | $42.86 |
| 33.33% | 50.00% | $150.00 | $50.00 |
| 40% | 66.67% | $166.67 | $66.67 |
| 50% | 100.00% | $200.00 | $100.00 |
| 60% | 150.00% | $250.00 | $150.00 |
| 70% | 233.33% | $333.33 | $233.33 |
| 75% | 300.00% | $400.00 | $300.00 |
| 80% | 400.00% | $500.00 | $400.00 |
What happens if you confuse margin and markup?
Confusing them underprices your product. If you want a 40% margin on a $60 item but apply a 40% markup instead, you charge $84, not $100. Your profit is $24 rather than $40, and your real margin is 28.57%. That is $16 less profit per unit, a 40% shortfall against your target.
The error scales with volume: on 1,000 units it means $16,000 of missed gross profit. When a supplier, investor or lender asks about margin, make sure you are quoting profit over price, not profit over cost.
How do discounts affect profit margin?
Discounts come entirely out of profit, because the cost does not change. A 20% discount on a $100 item with a $60 cost lowers the price to $80 (use the discount calculator to check any sale price) and drops profit from $40 to $20, so the margin falls from 40% to 25%.
The last column shows how many more units you must sell to earn the same total profit as before. With a 20% discount, you need twice the sales volume to break even on the promotion.
| Discount on $100 item, $60 cost | Sale price | Profit per unit | Margin | Extra units to match $40 profit |
|---|---|---|---|---|
| 0% | $100 | $40 | 40.00% | None |
| 10% | $90 | $30 | 33.33% | 33% more |
| 20% | $80 | $20 | 25.00% | 100% more |
| 30% | $70 | $10 | 14.29% | 300% more |
| 40% | $60 | $0 | 0.00% | Never breaks even |
Does sales tax count in profit margin?
No. Sales tax you collect from customers is generally passed on to the state, so it is not part of your revenue and should be left out of margin math. A $100 sale at a 6.5% sales tax rate rings up as $106.50, but only $100 is revenue, and the $6.50 goes to the tax authority. Our sales tax calculator splits any receipt into its before-tax price and tax.
Including tax in revenue overstates margin. Using $106.50 instead of $100 on the $60 cost item would show a 43.66% margin rather than the true 40%.
Calculators in this guide
Frequently asked questions
Is a 50% markup the same as a 50% margin?
No. A 50% markup equals a 33.33% margin, and a 50% margin requires a 100% markup. On a $100 cost, a 50% markup prices the item at $150, while a 50% margin prices it at $200.
How do I calculate a 30% margin?
Divide the cost by 0.70. A $70 cost needs a $100 price for a 30% margin, which leaves $30 of profit. Applying a 30% markup would give only $91 and a 23.08% margin.
What is a good profit margin?
It varies widely by industry, so compare yourself with businesses like yours and with your own past results. A gross margin is healthy only if it leaves enough to cover overhead, interest and taxes and still produce a net profit.
What is the difference between gross margin and net margin?
Gross margin subtracts only the cost of goods sold from revenue. Net margin subtracts all expenses, including overhead, interest and taxes, so it is lower.
Can profit margin be negative?
Yes. If you sell below cost, profit and margin are both negative. A $60 cost item sold at $50 has a margin of -20%.
This guide is for education and is not financial, tax or legal advice. Confirm figures with a qualified professional or your lender.