Margin vs markup
People confuse these two constantly. Both use the same profit number, but they divide by different things.
Margin = profit / revenue Markup = profit / cost
A 50% margin is a 100% markup. A 25% margin is a 33% markup. When pricing, decide which one you mean.
Calculating margin by hand
Example: you buy a product for $30 and sell it for $50.
- Profit: $50 − $30 = $20.
- Margin: $20 ÷ $50 = 0.40, or 40%.
- Markup: $20 ÷ $30 = 0.667, or 66.7%.
To go the other way and set a price from a target margin, divide the cost by 1 minus the margin. For a 40% margin on a $40 cost: $40 ÷ 0.60 = $66.67.
If you only know one of the two percentages, you can convert: margin = markup ÷ (1 + markup), and markup = margin ÷ (1 − margin), with both written as decimals.
Target margin to price and markup
| Target margin | Selling price | Profit | Equivalent markup |
|---|---|---|---|
| 10% | $111.11 | $11.11 | 11.1% |
| 20% | $125.00 | $25.00 | 25.0% |
| 25% | $133.33 | $33.33 | 33.3% |
| 30% | $142.86 | $42.86 | 42.9% |
| 40% | $166.67 | $66.67 | 66.7% |
| 50% | $200.00 | $100.00 | 100.0% |
| 60% | $250.00 | $150.00 | 150.0% |
| 75% | $400.00 | $300.00 | 300.0% |
Notice how the price climbs faster as the margin rises. Going from 50% to 75% margin doubles the price.
Why margin caps below 100%
Margin is profit divided by revenue. To reach 100% margin, cost would need to be zero. That's why margins above ~95% are economically nonsensical for most real products. Markup has no such ceiling: a $10 item sold for $50 has a 400% markup but an 80% margin.
Common pricing mistakes
- Using markup when you meant margin. Adding a 40% markup to a $40 cost gives $56, which is only a 28.6% margin. To earn a 40% margin you need to charge $66.67.
- Leaving costs out. Include shipping, packaging, payment processing and marketplace fees in the cost per item, or your real margin will be lower than the calculator shows.
- Underestimating discounts. On a $50 item that costs $30, a 20% discount cuts the price to $40 and profit from $20 to $10. Margin falls from 40% to 25% and profit per sale halves.