Margin and markup are not the same thing
Two percentages describe the same profit, and mixing them up is one of the most common pricing mistakes in small businesses.
- Gross margin is profit as a share of the selling price. It tells you how much of every dollar of revenue you keep after paying for the product.
- Markup is profit as a share of the cost price. It tells you how much you add on top of what you paid.
Because the selling price is always higher than the cost (if you make a profit), the margin is always the smaller of the two numbers. A product bought for $40 and sold for $60 has a profit of $20: a markup of 50% but a margin of only 33.3%. If you aim for a “50% margin” but apply a 50% markup, you earn far less than planned.
The formulas
profit = selling price − cost price
gross margin (%) = profit ÷ selling price × 100
markup (%) = profit ÷ cost price × 100
selling price for a target margin = cost price ÷ (1 − margin ÷ 100)
Example 1: you buy a lamp for $40 and sell it for $65. The profit is $25, the margin 25 ÷ 65 = 38.5% and the markup 25 ÷ 40 = 62.5%.
Example 2: you want a 35% gross margin on an item that costs $40. The selling price is 40 ÷ (1 − 0.35) = 40 ÷ 0.65 = $61.54. Check: profit $21.54 ÷ $61.54 = 35%.
Converting between margin and markup
markup = margin ÷ (1 − margin)
margin = markup ÷ (1 + markup)
| Gross margin | Equivalent markup |
|---|---|
| 10% | 11.1% |
| 20% | 25% |
| 25% | 33.3% |
| 33.3% | 50% |
| 40% | 66.7% |
| 50% | 100% |
| 60% | 150% |
What counts as cost?
For gross margin you normally include only the direct cost of the product: purchase price, inbound shipping and, for manufactured goods, materials and direct labour. Overheads such as rent, salaries, software and marketing come out of the gross profit later. That is why a healthy gross margin needs to be well above zero: it has to pay for everything else and still leave a net profit.
Typical gross margins vary widely by sector. Supermarkets often work with margins in the 20–30% range, fashion and cosmetics retailers frequently aim for 50–60%, and software or digital products can exceed 80%. Compare yourself with businesses like yours rather than with a general rule.
Sales tax and VAT
Always calculate margins on prices excluding VAT or sales tax. The tax is not your revenue; you collect it for the government. If your shelf price includes VAT, first remove it with the VAT calculator, then calculate the margin on the net price.
Pricing tips
- Plan discounts in advance. A 20% discount on a product with a 40% margin halves your gross profit per unit. Check the effect with the discount calculator.
- Watch fees. Marketplace commissions, payment fees and returns reduce your effective margin. Add them to the cost price for a realistic picture.
- Round sensibly. After calculating the exact price, round to a price point your customers expect, then recheck the margin.
- Compare periods with the percentage change calculator to see how your margin develops month by month.
Frequently asked questions
What is the difference between margin and markup?
Margin divides profit by the selling price; markup divides profit by the cost price. Selling at $60 something that cost $40 is a 33.3% margin but a 50% markup.
How do I calculate a selling price from a desired margin?
Divide the cost by one minus the margin as a decimal. For a 30% margin on a $70 cost: 70 ÷ 0.70 = $100.
Can a margin be more than 100%?
No. Gross margin can approach but never reach 100%, because profit can never exceed the selling price. Markup, on the other hand, can be any size: a 300% markup is common for some products.
What is a good profit margin?
It depends on the industry, sales volume and overheads. A low-margin business can be very profitable with high volume, while a niche business needs higher margins to cover its fixed costs.
Should I include VAT or sales tax?
No. Use prices excluding tax for both cost and selling price. Tax collected from customers is passed on to the tax authorities and is not part of your profit.
Last reviewed: 2026-10-06. Results are estimates for information only.