Margin vs markup: the pricing mistake that quietly costs you money

Suppose a product costs you $60 and you sell it for $100. Your profit is $40. Measured against the selling price, that is a 40% margin. Measured against cost, it is a 66.7% markup. Nothing about the sale changed; only the number you divide by.

The confusion matters because people tend to set prices using markup but read their accounts in margin. If you decide you need a 40% margin and then add 40% to cost, you end up with a 28.6% margin instead.

All four formulas use the same three numbers: cost, selling price and profit (price minus cost).

To turn a markup into a margin, divide the markup by (1 + markup). To turn a margin into a markup, divide the margin by (1 − margin). Some common pairs are worth memorising:

Use margin when you think about the health of the business. Lenders, investors and buyers compare businesses by gross margin, and your overheads are paid out of margin. Use markup when it is a convenient way to set prices day to day, such as a contractor adding a percentage to materials, but check the resulting margin.

A useful habit is to decide your target margin first, from your overheads and the profit you want, then work out the markup that produces it.

Gross margin only covers the cost of the item or job itself. Rent, wages, software, insurance and marketing all come out of it. If your overheads are 30% of revenue, a 30% gross margin means you are working for nothing. The break-even calculator shows how many sales you need at a given margin to cover fixed costs.