Pricing
Markup vs profit margin: the difference every seller needs to know
Markup and profit margin describe the same profit using different bases. Learn both formulas, a conversion table and a pricing mistake that costs sellers money.
· 2 min read
Markup and profit margin are two ways of describing the same profit. They sound alike, they are often used as if they were the same thing, and mixing them up is one of the most common reasons sellers price products too low. The difference is simple: they divide by different numbers.
The two formulas
Markup % = (Selling price - Cost) / Cost x 100
Profit margin % = (Selling price - Cost) / Selling price x 100
Markup measures profit against what the product cost you. Margin measures profit against what the customer pays. Because the selling price is always larger than the cost, the margin percentage is always smaller than the markup percentage.
A worked example
You buy a product for $40 and sell it for $100. The profit is $60.
| Measure | Calculation | Result |
|---|---|---|
| Markup | $60 / $40 x 100 | 150% |
| Profit margin | $60 / $100 x 100 | 60% |
Both numbers are correct. They answer different questions: markup says how far you moved the price above cost, and margin says how much of each sale you keep.
How markup converts to margin
The conversion is margin = markup / (1 + markup), with markup written as a decimal. These common pairs show how far apart the two numbers get as the markup grows.
| Markup | Profit margin |
|---|---|
| 25% | 20% |
| 50% | 33.3% |
| 100% | 50% |
| 200% | 66.7% |
The mistake that costs sellers money
Suppose you want a 30% profit margin, so you add 30% to your cost. Your product costs $70. A 30% markup gives a price of $91 and a profit of $21. But $21 is only 23.1% of $91, not 30%.
To really keep 30% of the sale, divide the cost by (1 - 0.30) instead: $70 / 0.70 = $100. The profit is then $30, which is 30% of $100. If you think in margin, price with the margin formula. If you think in markup, use markup. Do not switch halfway.
Which one should you use?
- Use profit margin to judge how profitable a product or business is, and to compare products. It is also the number most financial reports use.
- Use markup when you set a price from a cost, for example when a supplier quotes you a cost and you add a standard percentage.
- Always ask which one a supplier, platform, accountant or course means when they quote a percentage. The same word can be used loosely.
Check your own numbers
The Markup Calculator shows markup, margin and the selling price for a markup you choose. To see your real profit after shipping and fees, use the Profit Margin Calculator. To work backwards from a target margin to a price, use the Product Pricing Calculator.
This guide is general information with simplified examples. It is not financial, tax or legal advice. Your real fees, costs and results will differ, so check them against your own marketplace and carrier statements.