Margin and markup are two views of the same profit
Both numbers describe one thing — the gap between what an item costs you and what you sell it for — but they use different denominators, and confusing them is the fastest way to lose money. Gross margin divides profit by the selling price; markup divides profit by the cost. Buy for 10 and sell for 15 and you have made 5, which is a 50% markup but only a 33.3% margin.
The four formulas worth memorising
- Profit = price − cost
- Margin % = profit ÷ price × 100
- Markup % = profit ÷ cost × 100
- Price from a target margin = cost ÷ (1 − margin). For a 40% margin on a 10 cost: 10 ÷ 0.6 = 16.67
Converting between them is a one-line job: markup = margin ÷ (1 − margin) and margin = markup ÷ (1 + markup). Because margin is capped by the selling price, a 100% markup is only a 50% margin, and reaching a 90% margin means marking cost up tenfold.
Why the distinction costs people real money
The classic mistake is applying a target margin as if it were a markup. If you want a 40% margin and add 40% to cost, you actually get 40 ÷ 140 = 28.6% — several points short on every sale. The same trap appears in reverse when a supplier offers a discount: money off your cost falls straight through to profit, while money off your price cuts margin twice as fast. Discounting a 15 price by 10% drops profit from 5 to 3.50, a 30% cut in profit for a 10% cut in price.
Margins by industry, and what “good” means
Gross margin is before rent, wages, marketing and tax, so it has to cover all of those plus net profit. Retailers commonly work at 20–50% gross margin, restaurants run higher because food cost is their main variable, and service businesses with low direct costs often sit above 50%. A useful sanity check is your break-even: divide monthly fixed costs by your gross margin percentage to see the revenue you must book just to get to zero. The calculator above shows the totals for your quantity so you can test a whole order rather than a single unit.
Frequently asked questions
What is the difference between margin and markup?
Margin compares profit with the selling price, markup compares profit with the cost. Buy at 10, sell at 15: profit is 5, which is a 50% markup (5 ÷ 10) but a 33.3% margin (5 ÷ 15). Markup is always the larger number, and the gap widens as the margin grows.
How do I convert markup to margin?
Margin = markup ÷ (1 + markup). A 50% markup gives 50 ÷ 150 = 33.3%. Going the other way, markup = margin ÷ (1 − margin), so a 40% margin equals 40 ÷ 60 = 66.7% markup. The converter tab does both directions as you type.
How do I calculate a selling price from a target margin?
Divide the cost by one minus the margin as a decimal: price = cost ÷ (1 − margin). For a 40% margin on a 10 cost, 10 ÷ 0.6 = 16.67. Note this is not the same as adding 40% to cost — that would give 14 and only a 28.6% margin.
What is a good gross margin?
It depends on your cost structure, not on a universal number. Retail commonly runs 20–50%, restaurants need more because food is their main variable cost, and service businesses with few direct costs often exceed 50%. The real test is whether the margin covers your fixed costs and leaves a profit.
Why does a small discount hurt profit so much?
Because the discount comes entirely out of profit. Cutting a 15 price to 13.50 saves the customer 10% but reduces profit from 5.00 to 3.50 — a 30% fall, and margin drops from 33.3% to 25.9%. The lower your margin, the more brutal this ratio becomes.
Is gross profit the same as net profit?
No. Gross profit is revenue minus the direct cost of the goods or services sold, which is what this calculator shows. Net profit subtracts everything else — rent, wages, marketing, interest and tax. A healthy gross margin can still end in a net loss if overheads are too high.