Start with profit
For a simple item, gross profit is the selling price minus the item's direct cost. If an item costs $60 and sells for $100, gross profit is $40. This simple calculation does not include rent, payroll, payment processing, shipping, taxes, returns, or other costs. Those can make actual business profit very different.
Margin uses the selling price
Profit margin answers, “What share of the selling price is gross profit?” The formula is margin = profit ÷ selling price × 100%. With $40 profit on a $100 sale, margin is 40%.
A margin target is often useful when comparing revenue and gross profit across items. It is a percentage of the amount received from a customer, not a percentage of the item's cost.
Markup uses the cost
Markup answers, “How much was added to cost?” The formula is markup = profit ÷ cost × 100%. For the same $60 cost and $100 selling price, markup is $40 ÷ $60 = 66.67%.
The percentages differ because $40 is being divided by two different amounts. Saying “40% markup” when you mean “40% margin” can produce a price that is much lower than intended.
Compare a few examples
| Cost | Price | Gross profit | Margin | Markup |
|---|---|---|---|---|
| $60 | $100 | $40 | 40% | 66.67% |
| $80 | $100 | $20 | 20% | 25% |
| $50 | $75 | $25 | 33.33% | 50% |
Why the mix-up matters
Suppose cost is $60 and someone adds a 40% markup. The price becomes $60 × 1.40 = $84. Profit is $24, so margin is $24 ÷ $84 = 28.57%. To achieve a 40% gross margin on that $60 cost, the price would instead be $60 ÷ (1 − 0.40) = $100. The words sound similar, but the two prices differ by $16.
Convert between the two
Use percentages as decimals for these formulas: markup = margin ÷ (1 − margin) and margin = markup ÷ (1 + markup). A 25% margin becomes 0.25 ÷ 0.75 = 33.33% markup. A 50% markup becomes 0.50 ÷ 1.50 = 33.33% margin. These are exact conversions before rounding, as long as cost and selling price are positive.
When to use each number
Margin is handy for asking how much gross profit is retained from sales revenue. Markup is handy when building a price from known cost. Before comparing two products or setting a target, check which denominator is being used and whether additional costs belong in your analysis. This guide explains arithmetic, not accounting, tax, or professional business advice.
Key takeaway
Margin divides gross profit by selling price; markup divides it by cost. Name the measure before using the percentage.