An item costs you 70. You want a 30% margin, so you add 30% and price it at 91. You have just earned 23.1%, not 30%, and given away almost a quarter of the profit you planned. Do that across a catalogue for a year and the shortfall is not rounding — it is the difference between a business that clears its overheads and one that does not.
The error is so common because both numbers are called percentages and both describe the same pile of money. They differ only in what they divide by, and that one detail changes the answer every time.
What is the difference between margin and markup?
Margin is profit as a share of the selling price. Markup is profit as a share of the cost. The profit is identical; the denominator is not. An item costing 100 and selling for 150 carries a 50% markup and a 33.3% margin, because 50 divided by 100 is half while 50 divided by 150 is a third.
Since the selling price of a profitable item is always larger than its cost, markup is always the bigger percentage. Anyone quoting a percentage without saying which one they mean is worth stopping and asking.
The four formulas worth memorising
- Gross profit = Price − Cost
- Margin % = (Price − Cost) ÷ Price × 100
- Markup % = (Price − Cost) ÷ Cost × 100
- Price from a target margin = Cost ÷ (1 − margin)
The fourth is the one that fixes the opening mistake. For a 30% margin on a cost of 70, divide 70 by 0.70 and you get 100. Not 91. The division, not the addition, is what produces the margin you asked for. The profit margin calculator runs both directions, so you can enter cost and price to see what you are actually earning, or enter a target margin to get the price you need.
Converting between the two
These pairs come up often enough that they are worth knowing by sight.
| Markup | Margin | On a cost of 100 |
|---|---|---|
| 15% | 13.0% | sells at 115 |
| 25% | 20.0% | sells at 125 |
| 50% | 33.3% | sells at 150 |
| 100% | 50.0% | sells at 200 |
| 150% | 60.0% | sells at 250 |
The conversion in one line: margin = markup ÷ (100 + markup). Doubling your cost, which the trade calls keystone pricing, is a 100% markup and a 50% margin. Wholesalers and retailers routinely describe the same transaction using the two different numbers, and a plan built on one while measuring the other misses target every quarter.
What a discount actually costs
Discounts are where the distinction stops being academic. Take a product priced at 100 with a cost of 60, giving a 40% margin. Cut the price by 10%.
The new price is 90 and the cost is unchanged at 60, so profit falls from 40 to 30. That is a 25% reduction in gross profit from a 10% reduction in price, and the margin drops to 33.3%. To earn the same gross profit as before, you now need to sell a third more units.
Margin also sets the hard limit on any promotion. If your margin is 30% of price, a 30% discount takes the contribution to zero — every unit sold at that price pays you nothing toward rent, wages, or anything else, no matter how many move. Modelling the volume you would need after a discount is usually more revealing than modelling the discount itself.
The costs people leave out
A margin calculated against the wrong cost figure is confidently wrong. Whatever sits between the price and the money you keep belongs in the cost side:
- Payment processing, commonly 1.5% to 3% of the transaction
- Marketplace commission, which can reach 15% or more on some platforms
- Outbound shipping and packaging when you absorb it rather than charging it
- Returns and breakage, averaged across the product line
- Sales commission where it is paid per unit
Fold those in and the comfortable 40% margin on the spreadsheet often lands closer to 28%. That is the number worth pricing against.
Gross margin is not net margin
Everything above works at the unit level, on the direct cost of the goods. That is gross margin: what each sale contributes before the costs of running the business are paid.
Net margin subtracts everything else — rent, salaries, software, marketing, interest, tax — and is measured over a period rather than per unit. A business can hold a healthy 45% gross margin and still lose money if its fixed costs outrun its sales volume. The question of how much volume it takes to cover those fixed costs is a different calculation, handled by the break-even calculator.
What counts as a good margin?
It depends entirely on the cost structure of the industry, so comparisons only mean something between similar businesses. Grocery retail runs on gross margins in the low twenties and survives on volume. Restaurants often sit between 60 and 70% on food before labour and rent take most of it. Software can exceed 80% because the marginal cost of another copy is near zero.
Rather than chasing a benchmark, work out the margin you need: total fixed costs divided by the sales volume you can realistically reach, expressed as a share of price. That number is specific to your business, and it is the one that matters.
Frequently asked questions
Can a margin be more than 100%?
No. Margin is a share of the selling price, so it approaches 100% only as cost approaches zero and can never pass it. Markup has no ceiling — an item costing 1 and selling for 100 carries a 9,900% markup and a 99% margin.
Which should I set my prices from?
Set prices from margin, because margin maps directly onto the profit line in your accounts. Use markup only when a supplier or an industry convention states it that way, and convert it before comparing. Whichever you pick, use the same one everywhere.
My supplier quotes markup and my accountant talks about margin. How do I reconcile them?
Convert the supplier's markup with margin = markup ÷ (100 + markup) and you are speaking the same language. A supplier offering keystone pricing is describing a 50% margin, which is what your accounts will show.
How do I handle products with very different margins?
Use a weighted average based on your actual sales mix rather than a simple average across the catalogue. A mix that shifts toward lower-margin lines lowers your blended margin even when no individual price has changed, which is a common and quiet cause of a bad quarter.
Should my own salary be in the cost?
If you need to draw a set amount to live on, include it somewhere — either in unit cost for a service business or in fixed costs for a product business. Leaving it out produces a margin that looks fine while you are personally unpaid. Many owners run both versions to see the survival point and the sustainable point.
The same arithmetic drives publishing economics, where the printer's cost and the retailer's discount both come out of the cover price: the math of margin on KDP wholesale breakpoints works the identical calculation from the author's side. The rest of the finance calculators cover the loan, tax, and cash-flow side of the same question.