Margin vs markup: the denominator matters
Margin and markup both start from the same gross profit, which is price minus cost. They differ only in what they divide by. Margin divides by price; markup divides by cost. Mixing them up is one of the most common pricing errors in small businesses.
The two formulas
Gross margin = gross profit ÷ price
Markup = gross profit ÷ cost
Gross margin is the measure that appears on a multi-step income statement, where gross margin (gross profit) is net sales minus cost of goods sold (OpenStax Principles of Accounting §6.6). Markup is a pricing convention: a percentage added on top of cost.
Worked example (illustrative)
A product costs $60 and sells for $100.
- Gross profit = $100 − $60 = $40
- Gross margin = $40 ÷ $100 = 40%
- Markup = $40 ÷ $60 = 66.67%
Both percentages describe the same $40. Because cost is always smaller than price when the sale is profitable, markup is always the larger number.
Converting between them
Markup = margin ÷ (1 − margin)
Examples: a 50% markup is 0.5 ÷ 1.5 = 33.33% margin. A 25% margin is 0.25 ÷ 0.75 = 33.33% markup. A 100% markup ("keystone" pricing, doubling the cost) is a 50% margin.
Lookup table
| Gross margin | Equivalent markup | Price for a $60 cost |
|---|---|---|
| 10% | 11.11% | $66.67 |
| 20% | 25% | $75.00 |
| 25% | 33.33% | $80.00 |
| 30% | 42.86% | $85.71 |
| 33.33% | 50% | $90.00 |
| 40% | 66.67% | $100.00 |
| 50% | 100% | $120.00 |
| 60% | 150% | $150.00 |
| 75% | 300% | $240.00 |
The classic mistake: using a markup to hit a margin
Suppose you want a 40% margin and price by adding 40% to cost: $60 × 1.40 = $84. Gross profit is $24 and margin is $24 ÷ $84 = 28.57%, more than 11 points short. To get a true 40% margin, divide instead: $60 ÷ (1 − 0.40) = $100.
The error gets bigger as targets rise. A "50% markup" intended as a 50% margin gives $90 instead of $120 on a $60 cost: a 33.33% margin rather than 50%.
When each measure is useful
| Situation | Usually quoted as | Why |
|---|---|---|
| Setting a price from a supplier cost | Markup | Quick multiplication from a known cost |
| Comparing profitability across products | Margin | Expressed as a share of revenue, comparable with income statements |
| Reading a financial statement | Margin | Gross margin is reported against net sales |
| Talking to a retailer or distributor | Ask which one | Conventions vary; confirm the denominator in writing |
Checklist when someone quotes a percentage
- Ask: "percent of price, or percent of cost?"
- Confirm what "cost" includes: invoice only, or landed cost with freight and duties.
- Check whether discounts and payment fees come off before or after the percentage.
- Convert to gross profit in dollars per unit; dollars are unambiguous.
Is a higher markup always better?
Not necessarily. A higher markup raises gross profit per unit but may reduce how many units you sell; total gross profit is gross profit per unit multiplied by units. The discounts and margin guide shows the trade-off in both directions, and the sensitivity table guide shows how quickly margin moves when price or cost changes.
Margin vs markup vs contribution margin
Gross margin subtracts cost of goods sold. Contribution margin, used for break-even analysis, subtracts all variable costs including variable selling costs such as commissions, and nothing fixed. They answer different questions; contribution margin is explained on the sibling site ameticapital.com.
Sources for definitions
- OpenStax, Principles of Accounting Vol. 1 §6.6: Multi-step income statements and gross margin
- OpenStax, Principles of Accounting Vol. 1 §6.1: Merchandising activities and gross margin
Definitions follow standard accounting usage as presented in the sources above. All dollar figures on this page are our own illustrative arithmetic.
Educational arithmetic only. Results do not set a suitable price or establish suitability for any lending, investment or business decision. See Use & limitations.