How it's calculated
Profit is the selling price minus the cost. Margin and markup both compare that profit to something, but not to the same thing: margin compares it to the price, markup compares it to the cost.
Profit = price − cost
Margin = profit ÷ price × 100
Markup = profit ÷ cost × 100
Price for a target margin = cost ÷ (1 − margin ÷ 100)
Most you can pay = price × (1 − margin ÷ 100)
Worked example: a $35 item, aiming for a 30% margin
To keep 30% of the selling price as profit, the cost has to be the other 70%. So the price is 35 ÷ 0.70 = $50.00. Check it: $50.00 − $35.00 = $15.00 profit, and 15 ÷ 50 = 30%. The markup on that sale is 15 ÷ 35 = 42.9%.
The common mistake is to add 30% to the cost instead. That gives 35 × 1.30 = $45.50, a profit of $10.50 and a margin of only 23.1%. On a year of sales, that gap adds up.
Margin vs markup
Margin answers "how much of each sale do I keep?" It is what accountants call gross margin: gross profit divided by revenue (see the Corporate Finance Institute's definition). Markup answers "how much did I add on top of what I paid?" Because the price is always bigger than the cost when you make a profit, the markup percentage is always the larger of the two.
Margin can never reach 100% while the item costs something, but markup has no ceiling. A 300% markup is common for some goods; a 300% margin is impossible.
| Margin you want | Markup on cost | Multiply cost by |
|---|---|---|
| 10% | 11.1% | 1.111 |
| 15% | 17.6% | 1.176 |
| 20% | 25% | 1.25 |
| 25% | 33.3% | 1.333 |
| 30% | 42.9% | 1.429 |
| 35% | 53.8% | 1.538 |
| 40% | 66.7% | 1.667 |
| 50% | 100% | 2 |
| 60% | 150% | 2.5 |
| 70% | 233.3% | 3.333 |
| 75% | 300% | 4 |
| 80% | 400% | 5 |
What to put in "cost"
- For products, use the landed cost: what you paid the supplier plus inbound shipping, duties and packaging.
- For services, use the direct cost of delivering the job, such as materials and subcontractor time.
- Payment processing fees and marketplace fees come out of each sale. Add them to the cost if you want the margin you actually keep.
- Rent, software and your own salary are overheads. Leave them out for gross margin, and make sure your gross margin is big enough to cover them.
Reading the result
A margin on its own does not tell you whether a price is good. Compare it with what your overheads take out of each sale. If rent, software, insurance and wages come to 25% of your revenue, a 30% gross margin leaves about 5% as real profit, and a 20% margin means you are losing money even though every item sells above cost.
Results are rounded to the nearest cent. Percentages are shown to two decimal places.
Questions people ask
What is the difference between margin and markup?
Both use the same profit figure but divide it by different numbers. Margin divides profit by the selling price; markup divides it by the cost. An item that costs $60 and sells for $100 makes $40 profit: a 40% margin (40 ÷ 100) and a 66.7% markup (40 ÷ 60).
How do I price something to get a 30% margin?
Divide the cost by 0.70 (that is, 1 minus 0.30). A $35 cost needs a price of $50.00 for a 30% margin. Adding 30% to the cost gives $45.50, which is only a 23.1% margin.
Can a profit margin be 100%?
Only if the item cost you nothing. Margin is profit divided by price, and profit can only equal the price when the cost is zero. For anything with a cost, the margin is always below 100%, no matter how high the price goes.
Can a margin be negative?
Yes. If you sell below cost, profit is negative and so is the margin. An item that costs $120 and sells for $100 has a margin of minus 20%.
Is this gross margin or net margin?
It is gross margin on one item or one sale: price minus the direct cost of the goods. Net margin also subtracts rent, wages, fees, shipping and other overheads, so it is always lower. Put those costs into the cost field if you want a rough per-item net figure.