Margin and markup both describe profit, but they measure it against different things, and mixing them up is one of the most common pricing mistakes.
Both numbers are shown together, which is the quickest way to stop mixing them up.
How to use the Margin Calculator#
- Choose what you know. Pick cost and price, cost and margin, or price and margin.
- Enter the numbers. Use the same currency for cost and price.
- Read margin and markup. The result shows both, along with the profit per unit.
The formulas#
A product that costs 60 and sells for 100 earns 40. The margin is 40 ÷ 100 = 40 percent. The markup is 40 ÷ 60 = 66.7 percent. Same product, two different percentages.
Margin versus markup#
Margin is profit as a share of the selling price. Markup is profit as a share of the cost. A 50 percent markup gives a margin of only 33.3 percent, not 50. If you want a 50 percent margin, you need a markup of 100 percent, which means selling at double your cost.
| Markup | Margin |
|---|---|
| 25% | 20% |
| 50% | 33.3% |
| 100% | 50% |
| 150% | 60% |
Gross margin isn’t net profit#
This is gross margin, which counts only the direct cost of the product. Rent, wages, marketing and tax come out after. For a fuller view, use the profit calculator.
A worked example#
A shop buys a pair of trainers for ₦18,000 and sells them for ₦27,000. Gross profit is ₦9,000. Gross margin is 9,000 ÷ 27,000 = 33.3 percent. Markup is 9,000 ÷ 18,000 = 50 percent. Same sale, same profit, two quite different numbers, because the margin is measured against the selling price and the markup against the cost.
| Markup on cost | Selling price on a cost of 100 | Gross margin |
|---|---|---|
| 10% | 110 | 9.1% |
| 25% | 125 | 20.0% |
| 50% | 150 | 33.3% |
| 100% | 200 | 50.0% |
| 200% | 300 | 66.7% |
Pricing from a target margin#
If you want a margin of 40 percent and your cost is ₦6,000, the selling price is cost ÷ (1 − margin) = 6,000 ÷ 0.6 = ₦10,000. Many people instead add 40 percent to the cost, which gives ₦8,400 and a margin of only 28.6 percent. This is the most common pricing error in small businesses, and it quietly eats profit on every sale. The calculator’s other two modes solve for the price or the cost when you know the margin.
What margin you need#
Typical gross margins differ widely: supermarkets often run on low double digits, clothing retail on 40 to 60 percent, and software above 80 percent. What matters is whether the margin covers your running costs, rent, wages, transport and tax, and leaves a profit. Work backwards from your monthly overheads. If they total ₦300,000 and your margin is 30 percent, you must sell ₦1,000,000 of goods a month before you make a naira. To test that, use the profit calculator, which also shows the break-even number of units.
What a discount does to margin#
Discounts hit profit harder than they seem to. An item sells for 100 and costs 67, a gross margin of 33 percent. A 10 percent discount drops the price to 90, and the profit falls from 33 to 23, a cut of 30 percent. To make the same total profit, you would have to sell 1.43 times as many, an increase of 43 percent in volume. Deep discounts only pay if they bring in many more buyers, or if they clear stock you would otherwise lose. Test the numbers before a sale with the calculator and the percent off calculator.
Frequently asked questions#
Margin is profit divided by price. Markup is profit divided by cost. Markup is always the larger number.
Divide your cost by 0.6. A cost of 60 gives a price of 100.
It depends on the industry. Retail margins are often much lower than software margins.
No. Margin can’t exceed 100 percent, but markup can.
Subtract the cost from the selling price to get gross profit, then divide the profit by the selling price and multiply by 100. For a cost of 60 and a price of 100, the profit is 40 and the margin is 40 percent. The calculator also shows markup, gross profit, cost and price.
Because they use different bases. Markup divides the profit by the cost, and margin divides it by the selling price. A 50 percent markup on a cost of 100 gives a price of 150, so the profit of 50 is a third of the price: a margin of 33.3 percent. To reach a 50 percent margin you need a 100 percent markup.
It depends on the trade. Groceries and fuel earn low margins on high volume, and clothing, cosmetics and handmade goods earn higher ones. Work out what margin you need to cover rent, wages, transport and tax, and compare it with competitors’ prices. If you cannot reach it, look at cutting costs or changing the product mix.