What is the difference between markup and margin, and which one do I price with?

Markup and margin both describe the same profit, but they measure it against different things. Markup is profit as a percentage of your cost. Margin is profit as a percentage of your selling price. For pricing, many owners work from the margin they want to keep, then calculate the price. Markup is a handy shortcut, but only if you convert it correctly.

The definitions

Markup is the amount you add on top of your cost, shown as a percentage of that cost.

Markup % = (Price − Cost) ÷ Cost

Margin (often called gross margin) is the share of the selling price that is left after cost.

Margin % = (Price − Cost) ÷ Price

The top line is the same in both: price minus cost, which is your gross profit in dollars. Only the bottom line changes. When you sell above cost, cost is smaller than price, so markup is a bigger percentage than margin for the same sale. A 50% markup does not give a 50% margin.

Gross profit is before overhead. Rent, wages, insurance, fuel and the like still have to be paid out of it, so a healthy-looking margin is not the same as take-home profit.

Which one to price with

Either can work, as long as you stay consistent and know which one you are using. Many owners find margin the easier base, for these reasons:

• Your other numbers are often shown against sales: overhead as a share of revenue, a target profit as a share of revenue. Margin lines up with those.
• If you want to know how much of each sales dollar you keep, margin answers it directly.
• Treating a markup percentage as if it were a margin leaves you with a lower margin than you intended.

Markup is common in the trades and in many small businesses, where the cost is known and the price is built up from it. That is fine. Just convert to margin to check that the price covers your overhead and leaves something for you.

Converting between them

You do not need a lookup table. You need two formulas.

• Margin from markup: Margin = Markup ÷ (1 + Markup)
• Markup from margin: Markup = Margin ÷ (1 − Margin)

Here, percentages are written as decimals (50% = 0.50).

The logic is that markup divides by cost and margin divides by price, and price equals cost plus profit. As markup grows, price grows too, so margin rises more slowly and can never reach 100%. A 50% margin means price is double cost, which is a 100% markup.

Some sample pairs, rounded:

Worked example

All numbers below are sample figures, chosen to be round.

Say a job costs you $100 in materials and direct labor.

Pricing with markup. You add a 25% markup: $100 × 1.25 = $125. Gross profit is $25.

• Markup = $25 ÷ $100 = 25%
• Margin = $25 ÷ $125 = 20%

Pricing with margin. Suppose you want to keep 25% of the sale as gross profit. Price = Cost ÷ (1 − Margin) = $100 ÷ 0.75 = about $133.33. Gross profit is about $33.33.

• Margin = $33.33 ÷ $133.33 = 25%
• Markup = $33.33 ÷ $100 = about 33%

Same $100 cost, two different prices: $125 versus about $133. The gap of about $8 is what you give up by treating a 25% markup as if it were a 25% margin. Across many jobs, that gap adds up.

Common mistakes

• Treating the two as the same number. A 30% markup is not a 30% margin (it works out to about 23%). Say which one you mean on quotes, spreadsheets and when talking to your bookkeeper.
• Calculating price as cost × (1 + target margin). To hit a target margin, divide cost by (1 − margin). Multiplying gives you a lower margin than you wanted.
• Forgetting overhead. Gross margin is before your operating costs. Work out what margin covers your overhead and leaves a profit before you settle on a number.
• Ignoring discounts. A discount comes off the price, not the cost, so it cuts into margin faster than many owners expect. Recheck the numbers after discounting.
• Using incomplete costs. If cost leaves out freight, fees, waste or your own labor time, your calculated markup and margin look better than they really are.

This guide explains concepts only and is not tax, legal or financial advice. For how your profit is reported or taxed, check your tax authority’s official guidance (such as the IRS in the United States) or ask a qualified accountant.