Markup versus margin, explained with one example

Markup and margin both describe profit as a percentage, which is why they get confused. They look at the same profit but divide it by different things. Mixing them up is one of the quieter ways small sellers underprice.

The two definitions

• Markup is profit as a percentage of cost.
• Margin is profit as a percentage of the selling price.

That is the whole difference. The profit is the same, and only the denominator changes.

One example

Say a product costs you Rs 100 and you sell it for Rs 150. Your profit is Rs 50.

• Markup: Rs 50 divided by the cost of Rs 100 is 50 percent.
• Margin: Rs 50 divided by the price of Rs 150 is 33.3 percent.

Same product, same sale, same Rs 50. One person calls it a 50 percent profit and another calls it 33.3 percent, and both are correct about what they measured.

Why the numbers differ

The cost is always smaller than the selling price when you make a profit. Dividing the same profit by a smaller number gives a bigger percentage. So markup is always higher than margin for the same sale.

You can also see this by flipping the question. If you say "I add 50 percent", you are talking about markup. If you say "I keep one third of what I charge", you are talking about margin.

Why people mix them up

There are a few common ways it happens.

• A supplier or a friend says "keep a 40 percent profit", and you do not ask whether it is on cost or on price.
• A spreadsheet template calls a column "margin" but the formula is a markup.
• You have a target margin, such as 40 percent, but you add 40 percent to your cost, as covered in why adding 30 percent to cost undershoots margin.
• Marketplace and ad reports talk about margin, while shop owners talk about markup.

The fix is to always ask: percent of what?

Which one should you use

Margin is easier to compare with other costs, because everything else in your business, such as shipping, ads and payment fees, can also be shown as a percentage of the selling price. Markup is quick for setting a price from a cost, because you multiply. A good habit is to set prices with markup if you like, but judge the business with margin.

If you only remember one thing, remember that a 100 percent markup is only a 50 percent margin. The next posts show how to convert markup to margin and margin to markup without a calculator.

Next step

Open your price list and check how you described your profit on each product. Write down whether it was on cost or on price. Once you can say which one you used, your pricing talks with suppliers, partners and an accountant get much clearer.