Profit Margin & Markup
Profit, margin and markup from a cost and a selling price.
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Formula
How the calculation works
Margin and markup are two ways of expressing the same profit against two different bases, and mixing them is the most expensive mistake in small-business pricing. Bought at 80 and sold at 120, the profit is 40. Margin divides that by the selling price, giving 33.3%. Markup divides it by the cost, giving 50%. One profit, two honest percentages, and no way to tell which someone means unless they say.
The two figures cannot drift apart at random, because margin's base is always the larger number. That means margin is always the smaller of the two, and it has a ceiling: as cost falls towards zero, markup grows without limit but margin can only approach 100%, never reach it. A product with 90% margin has a 900% markup, which is why quoting margin makes a business sound less profitable and quoting markup makes it sound more.
The tool refuses a cost of zero, because markup divides by cost and that would be undefined. It also allows a selling price below cost, returning a negative profit, which is the correct answer for a loss-making line and should be read as one rather than treated as an error.
Common mistakes
- Adding a margin percentage to cost to set a price. Adding 30% to an 80 cost gives 104, but a genuine 30% margin needs a price of about 114.
- Quoting markup while calling it margin, which makes a business look 1.5 times as profitable as it is on the same numbers.
- Assuming 50% margin and 50% markup are the same figure. They differ whenever the profit is not zero, and the gap widens as margin rises.
When to use it
- Use margin to compare profitability between products or months, since it is always measured against the sale price.
- Use markup when pricing from a known cost. If you know the margin you want and need the price, this tool does not solve that -- it takes the price as given.
Worked example
Bought at 80, sold at 120: profit 40, margin 33.3%, markup 50%.
Common questions
Are margin and markup the same?
No, and mixing them is the classic error. Margin divides by the selling price, markup by the cost, so the same profit gives two different figures.
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