Markup vs margin: the difference and how to convert one to the other

Markup vs margin: the difference

Markup and margin both start from the same profit: the selling price minus what the item cost you. They differ only in what that profit is divided by. Markup divides it by the cost. Margin divides it by the price.

That is why the two percentages differ on any sale that makes a profit. The table shows both side by side for one example item.

Mixing them up costs money. A maker who wants to keep half of every sale and adds a 50% markup keeps only a third of it.

Margin on one item is a gross margin: it counts only the cost of the item itself. The profit margin of a whole business is lower, because it also takes out overhead and taxes. The FDIC's Money Smart for Small Business course defines profit margin as net profit divided by revenue, usually shown as a percentage, and net profit as the amount of revenue remaining after deducting all costs, expenses, and taxes.

What is markup, and what is the markup formula

Markup is the amount you add on top of your cost to get a selling price. It can be stated in dollars or as a percentage of cost. The federal tax regulations on pricing between related companies (26 CFR 1.482-3) express a gross profit markup the same way, as a percentage of cost.

The markup formula is: markup percentage = (selling price − cost) ÷ cost × 100. The margin formula uses the same top line and divides by price instead: margin percentage = (selling price − cost) ÷ selling price × 100. The same regulations express gross profit margin as a percentage of total revenue derived from sales, and the SBA's contribution margin formula also divides by price: (sale price per unit – variable cost per unit) ÷ sale price per unit.

Both formulas start from gross profit. The FDIC defines gross profit as revenue minus the cost of goods sold, before overhead and taxes, and for Schedule C the IRS has product sellers work it out as net receipts minus the cost of goods sold. For resold goods, the Bureau of Labor Statistics measures a retailer's or wholesaler's margin price as current selling price minus current acquisition price.

For pricing, count everything it takes to make one unit: materials, packaging, your labor at an hourly rate you set, and a share of overhead such as tools, studio rent and software. If you count only materials, your markup looks larger than it really is.

How to calculate markup percentage, step by step

Example: a crochet bag. The yarn, lining and tag cost $9, and two hours of your time at $15 an hour adds $30, for a unit cost of $39. You plan to sell it for $65.

1. Work out the unit cost

   Add materials, packaging, labor and a share of overhead for one unit. In the example that is $39.

2. Subtract cost from price

   The selling price minus the unit cost is your gross profit per unit. $65 − $39 = $26.

3. Divide by cost for markup

   $26 ÷ $39 = 0.667. Multiply by 100 for a markup percentage of 66.7%.

4. Divide by price for margin

   $26 ÷ $65 = 0.40, a margin of 40%. The same bag has a 66.7% markup and a 40% margin.

Markup to margin conversion table

Find the markup you use in the first column to see the margin it gives you. The last column applies it to an item that costs $10 to make.

A 100% markup, doubling your cost, is the point where markup gives a 50% margin. The gap between the two numbers grows as the markup rises: a 10% markup is close to its margin, while a 300% markup gives a 75% margin.

How to convert markup to margin and back

You do not need the selling price to switch between the two. Write both as decimals (50% is 0.5) and use these formulas.

• Margin from markup: margin = markup ÷ (1 + markup). A 0.5 markup gives 0.5 ÷ 1.5 = 0.333, a 33.3% margin.
• Markup from margin: markup = margin ÷ (1 − margin). A 0.4 margin needs 0.4 ÷ 0.6 = 0.667, a 66.7% markup.
• Price from a markup: price = cost × (1 + markup). A $10 cost with a 0.5 markup is $15.
• Price from a target margin: price = cost ÷ (1 − margin). A $10 cost with a 0.4 target margin is $10 ÷ 0.6 = $16.67.

The last formula is the one to use when you know how much of each sale you want to keep. It gives the price directly, without guessing a markup first.

Markup on cost or markup on price: check which one you are given

This page measures markup on cost. Some businesses quote markup on the selling price instead, which gives the same number as margin. When a supplier, a wholesale buyer or a pricing tool gives you a markup figure, ask which base it uses.

IRS Publication 334 is an example of markup measured on price. Its gross profit check for retail and wholesale businesses is to divide gross profit by net receipts, then compare the percentage to your markup policy. In its worked example, net receipts are $300,000 and cost of goods sold is $200,000, and the gross profit share of 33 1/3% is called the markup percentage. Measured on cost, the same figures are a 50% markup: $100,000 of gross profit ÷ $200,000 of cost.

Publication 334 is a tax guide. This page uses its example only for the arithmetic, and it is general information, not tax advice.

Markup and margin on maker products

Example items with stated unit costs and prices. Your costs will differ. The rows are worked arithmetic and do not show typical prices.

A large markup on a low-cost item can still be a small profit in dollars, and labor changes the picture most. The bag's markup looks modest because two hours of work are in its cost. Leave the labor out and the same price shows a 622% markup, but the extra profit is only your wage.

What selling fees do to your margin

Example: a candle with a $10 unit cost, sold for $20 with a 100% markup and a 50% margin before fees. Platform fees come out of the same sale, so the margin you keep is lower.

How much should I mark up my products?

There is no single good markup percentage. The right one is the markup that still leaves the margin you need after selling fees, shipping and overhead. Decide that margin first, then work out the price.

Example: the candle above costs $10 and sells on Etsy for $20, a 100% markup. Etsy's fees on that sale come to $2.35, so the maker keeps less than the $10 the markup suggested and the margin falls below 50%.

To price for a margin after percentage fees, divide the cost by one minus the margin minus the fee rate. Example: a $10 cost, a 40% target margin and 10% in percentage fees give $10 ÷ (1 − 0.4 − 0.1) = $20. Add any fixed per-order fee to the cost before you divide.

• Count your labor in the unit cost, so the markup is profit on top of a wage.
• Check that the margin also covers fixed costs. The SBA's break-even formula is fixed costs ÷ (sales price per unit – variable cost per unit).
• Use one method across your shop. If you set prices with markup, check the result as a margin before you publish.
• If you sell wholesale, the shop adds its own markup on top of your wholesale price. Set the wholesale price from your own target margin first.

Where Nation fits

Questions about markup and margin