Margin vs. markup
They use the same two numbers but divide by different things, which is why they are so often confused.
Margin = (Price - Cost) / Price
Markup = (Price - Cost) / Cost
Price for target margin = Cost / (1 - Target margin)
Markup = (Price - Cost) / Cost
Price for target margin = Cost / (1 - Target margin)
A product that costs $40 and sells for $100 has a 60% margin but a 150% markup. Pricing with "50% markup" when you meant "50% margin" leaves you with a 33% margin instead.
| Markup | Equals margin |
|---|---|
| 25% | 20% |
| 50% | 33.3% |
| 100% | 50% |
| 150% | 60% |
| 300% | 75% |
Frequently asked questions
Can margin be over 100%?
No. Margin is a share of the price, so it can approach but never reach 100%. Markup can be any size.
What should I include in cost?
For gross margin, include the direct cost of the unit: product, packaging, shipping to you, and payment fees. Rent and salaries belong in net margin.