Profit margin vs markup: the difference, with examples

Margin and markup both describe how much profit you make on a sale, and people use the words as if they meant the same thing. They do not. A 50 per cent markup is a 33 per cent margin, and a 50 per cent margin needs a 100 per cent markup. Mix them up and you underprice your work, mislead a supplier or misread a competitor's accounts. This guide explains the two measures with a single worked example, gives the formulas and a conversion table, shows how to set a selling price from a target margin, explains how VAT and discounts interact with both, and lists the mistakes that lead to prices that quietly lose money.

By Valtrinity. Updated 18 October 2026.

The definitions

Profit is the selling price minus the cost. If you buy a chair for £60 and sell it for £100, your profit is £40.

Markup is the profit as a percentage of the cost. Here that is £40 divided by £60, which is 66.7 per cent. Margin is the profit as a percentage of the selling price. Here that is £40 divided by £100, which is 40 per cent.

The profit is the same in both cases, and only the base changes. Because the selling price is larger than the cost, margin is always a smaller number than markup, and margin can never be 100 per cent or more, while markup can be any size.

The formulas

Markup = (selling price minus cost) divided by cost, times 100. Margin = (selling price minus cost) divided by selling price, times 100.

To set a price from a markup, multiply the cost by one plus the markup. A cost of £60 with a markup of 50 per cent gives 60 times 1.5, which is £90. To set a price from a margin, divide the cost by one minus the margin. A cost of £60 with a margin of 50 per cent gives 60 divided by 0.5, which is £120.

The second formula surprises people. A 50 per cent margin means the cost is half the price, so the price is double the cost, which is a 100 per cent markup. Using the markup method by mistake, and multiplying by 1.5, gives £90, which is only a 33.3 per cent margin.

Converting between the two

To convert markup to margin, divide the markup by one plus the markup. A markup of 25 per cent is 0.25 divided by 1.25, which is 20 per cent margin. To convert margin to markup, divide the margin by one minus the margin. A margin of 40 per cent is 0.4 divided by 0.6, which is 66.7 per cent markup.

Here are the pairs worth remembering. Markup 10 per cent equals margin 9.1 per cent. Markup 25 per cent equals margin 20 per cent. Markup 33.3 per cent equals margin 25 per cent. Markup 50 per cent equals margin 33.3 per cent. Markup 100 per cent equals margin 50 per cent. Markup 200 per cent equals margin 66.7 per cent.

As markup grows, margin rises more and more slowly and approaches 100 per cent but never reaches it. Going from a 100 per cent markup to a 200 per cent markup raises the margin from 50 to 66.7 per cent, which is a smaller jump than it looks.

A worked example: a small online shop

A shop sells a candle for £18.00, and each candle costs £7.20 to make and pack. The profit is £10.80. The markup is 10.80 divided by 7.20, which is 150 per cent. The margin is 10.80 divided by 18.00, which is 60 per cent.

If the shop sells 200 candles a month, the revenue is £3,600, the cost is £1,440 and the gross profit is £2,160. Gross profit is before other costs such as rent, advertising, packaging not counted above, software and your own time. If those come to £1,300 a month, the profit after those costs is £860.

Looking at margin instead of markup makes the figure easier to link to the accounts. A gross margin of 60 per cent says that out of each £1 of sales, 60p is left after the direct costs to pay for everything else.

Setting a price from a target margin

Suppose you want a 35 per cent margin on a product that costs £42. The price is 42 divided by (1 minus 0.35), which is 42 divided by 0.65, so £64.62. Check: the profit is £22.62, and 22.62 divided by 64.62 is 35 per cent.

If you used a 35 per cent markup, the price would be 42 times 1.35, which is £56.70, and the margin on that price is only 25.9 per cent. The difference of £7.92 on each unit adds up quickly.

Work out the margin you need first. Take your overheads and the profit you want, divide by your expected sales, and see what that means for each item. A margin that looks high may still leave you short if your sales volume is lower than you expect.

VAT, discounts and fees

VAT is not part of your revenue or your cost, if you are VAT registered. Work out margin on the price before VAT. A shelf price of £120 including 20 per cent VAT is £100 net, and a cost of £60 net gives a margin of 40 per cent. If you wrongly used £120, the margin would look like 50 per cent, an overstatement.

Discounts cut into margin quickly. If your margin is 40 per cent and you offer 10 per cent off, the price falls from £100 to £90 and the profit from £40 to £30, so the margin falls to 33.3 per cent. To make the same profit as before, you would have to sell 33 per cent more units.

Include marketplace fees, payment fees and postage in your cost if you pay them. A £100 sale with 12 per cent in fees has a net revenue of £88 and the margin must be calculated on the real figures. Check each fee against a recent statement rather than relying on a headline rate.

Mistakes to avoid

The most common mistake is quoting one figure and meaning the other. When a supplier says they work on 30 per cent, ask whether it is markup or margin, because on a £70 cost it is the difference between a price of £91 and a price of £100.

Another is forgetting the costs that do not appear in the unit cost, such as returns, wastage and time spent on customer service. Gross margin is only the start. Net margin, which counts all costs, tells you whether the business is making money.

Finally, avoid pricing by copying a competitor without checking your own costs. Their costs, volumes and goals may be different, and a price that suits them could lose you money.

Tools mentioned in this guide

Frequently asked questions