Margin vs Markup: The Difference and How to Price With Both

The difference between margin and markup is what you divide the profit by. Markup is profit as a percentage of cost; margin is profit as a percentage of the selling price:

• Markup = (Price − Cost) ÷ Cost × 100
• Margin = (Price − Cost) ÷ Price × 100

If something costs £60 and sells for £100, the £40 profit is a 66.7% markup but a 40% margin. The same sale always has a lower margin than markup, and mixing the two up is one of the easiest ways to underprice. Quick conversions: a 25% markup is a 20% margin, 50% is 33.3%, and 100% is 50%.

To explain the difference between a markup and a margin in one line: markup tells you how much you added to what you paid, while margin tells you how much of each sale you keep. Both numbers describe the same sale, so neither is wrong. The trouble starts when a business decides it wants "40% on everything", calculates a 40% markup, and then wonders why its accounts show a 28.6% margin. This guide gives you the formulas, a conversion table, a method for pricing to a target margin, how VAT fits in, and how margin connects to break-even.

Our free profit margin calculator converts between cost, price, margin and markup in either direction, and the break-even calculator shows how many sales you need to cover your costs.

Margin vs markup formulas

Using cost (what the item costs you) and price (what you sell it for, excluding VAT):

Because price is always bigger than cost when you make a profit, margin is always the smaller percentage. Margin can never reach 100%, while markup has no upper limit.

Markup to margin conversion table

You can convert either way without knowing the actual prices:

• Margin = Markup ÷ (1 + Markup)
• Markup = Margin ÷ (1 − Margin)

The gap gets wider as the numbers grow. At low percentages the two are close; at retail-style markups they're very different. A "keystone" markup (doubling the cost) is a 100% markup but a 50% margin.

Why the difference matters

Your accounts use margin

Your profit and loss account shows gross profit as a share of sales, which is gross margin. If you price using markup but judge performance using margin, the numbers will never match your expectations.

Discounts eat margin faster than you think

If you sell at £100 with a £60 cost (40% margin) and run 20% off, the price drops to £80 and profit drops from £40 to £20. A 20% discount has halved your gross profit. To make the same total profit, you'd need to sell twice as many. Run any planned promotion through the percentage calculator and the margin calculator before you announce it.

Suppliers and industries quote differently

Wholesalers often talk in markup ("RRP is cost plus 100%"), while investors, lenders and accountants usually talk in margin. Always ask which one someone means.

How to price for a target margin

1. Work out the full unit cost. Include the product, packaging, inbound delivery and any per-unit payment or platform fees.
2. Choose your target margin, for example 40%.
3. Divide cost by (1 − margin). £18 ÷ (1 − 0.40) = £30.
4. Check the market. If competitors sell at £25, you need to cut cost, add value or accept a lower margin.
5. Add VAT if you're registered (see below).

The common mistake is step 3 done as a markup: £18 × 1.40 = £25.20, which is only a 28.6% margin.

Pricing with VAT

If you're VAT registered, the VAT you charge belongs to the tax authority (HMRC in the UK), so calculate margin and markup on prices excluding VAT, then add VAT at the end. At the standard rate of 20% (see GOV.UK's VAT rates):

Shelf price = Cost ÷ (1 − Margin) × 1.2

Worked example for a VAT-registered shop:

If you start from a VAT-inclusive shelf price, divide by 1.2 before you calculate margin. A £60 shelf price is £50 net. Calculating margin on £60 would overstate it. Our guide to how to calculate VAT covers the 1/6 VAT fraction and other shortcuts, and the VAT calculator does it instantly.

If you're not VAT registered, you can't reclaim VAT on your purchases, so the VAT you pay suppliers is part of your cost. Use the gross supplier price as your cost, and don't add VAT to your selling price.

Outside the UK, the principle is the same for any VAT, GST or sales tax: work out margin on the price before tax. In the US, sales tax is usually added at the till rather than included in the shelf price, so set your price for the target margin and let the tax sit on top.

Small business examples

A café selling coffee. Ingredients, cup and lid cost £0.85 a cup. The owner wants a 75% gross margin. Net price = £0.85 ÷ 0.25 = £3.40, plus VAT if the sale is standard-rated. The markup here is 300%, which sounds huge until you remember rent, staff and energy still have to come out of that gross profit.

A trades business quoting a job. Materials cost £1,200 and labour cost £1,800, so the direct cost is £3,000. For a 30% margin, the quote is £3,000 ÷ 0.7 = £4,285.71 net. Adding "30% on top" would give £3,900, a margin of just 23.1%.

An online shop. A product costs £12, plus £1.50 packaging and £3.20 delivery, a unit cost of £16.70. At a 50% margin, the net price is £33.40. Leaving delivery out of the cost would make the margin look healthier than it is.

Margin and break-even

Gross margin tells you what each sale contributes. Break-even tells you how many sales you need before you make any profit at all:

Break-even units = Fixed costs ÷ (Price − Variable cost per unit)

Example: fixed costs of £3,000 a month (rent, software, insurance), a net price of £50 and a variable cost of £30. Each sale contributes £20, so you need £3,000 ÷ £20 = 150 sales a month to break even.

Now see what a 20% discount does: price £40, contribution £10, break-even 300 sales. Halving the contribution doubles the sales you need. That's the same lesson as above, and the break-even calculator makes it easy to test.

A pricing review checklist

1. List your top products or services by sales.
2. Recalculate the full unit cost for each, including fees and delivery.
3. Calculate the actual margin on the net selling price.
4. Flag anything below your target margin.
5. Check how far below break-even a planned discount would take you.
6. Review prices whenever supplier costs change, not just once a year.

For businesses selling online, Make It Flow can automate the dull part of this, such as pulling supplier costs and sales data into one margin report each week, while you make the pricing decisions. See our page for ecommerce brands, browse our free tools for ecommerce, or talk to us.

FAQ

What is the difference between margin and markup?

Both measure profit on a sale, but they divide by different things. Markup divides profit by cost; margin divides profit by the selling price. Buy at £50 and sell at £75, and the £25 profit is a 50% markup but a 33.3% margin. Margin is always the lower figure.

How do I convert markup to margin?

Divide the markup by one plus the markup. A 50% markup is 0.5 ÷ 1.5 = 33.3% margin. To go the other way, divide the margin by one minus the margin: a 25% margin is 0.25 ÷ 0.75 = 33.3% markup. The conversion table in this guide covers common values.

What is a good profit margin for a small business?

It depends heavily on the sector, your overheads and how much you sell. A business with high fixed costs needs a higher gross margin than one with low overheads and high volume. Rather than chase a benchmark, work out the margin that covers your fixed costs at a realistic sales volume, using break-even.

Should I calculate margin before or after VAT?

If you're VAT registered, calculate margin on prices excluding VAT, because the VAT you charge goes to the tax authority. Add VAT to the net price at the end. If you're not registered, include any VAT you pay suppliers in your costs and don't add VAT to your selling price.

Is a 100% markup the same as a 100% margin?

No. A 100% markup means doubling the cost, for example buying at £20 and selling at £40, which is a 50% margin. A 100% margin is impossible unless the item cost you nothing, because margin is profit divided by price and profit can never exceed the price.

How do I work out the selling price from a target margin?

Divide your cost by one minus the target margin. For a £45 cost and a 40% margin, that's £45 ÷ 0.6 = £75. Check it: £30 profit ÷ £75 price = 40%. Add VAT afterwards if you're registered. Don't multiply cost by 1.4, which gives a 40% markup instead.

Related reading

• How to Calculate Your Break-Even Point: Formula and Examples: How to calculate your break-even point in units and sales: the formula, worked examples for products and services, target profit and margin of safety.