Markup vs. Margin: The Difference Every Business Owner Should Know
Business guide · Updated June 2026
Markup and margin are the two most confused numbers in small business, and the confusion is expensive. They are built from the same two figures — what something cost you and what you sold it for — but they divide by different things, so they are never equal. Mistake one for the other and you can spend a year thinking you make 40% on every sale when you actually keep 29%. This guide untangles them once, with the formulas, a quick conversion, and the cases where each belongs. If you would rather just punch in numbers, the markup calculator and the profit margin calculator each show their workings.
The same profit, two different bases
Start with one sale. You buy an item for £40 (the cost) and sell it for £60 (the price). The profit is £20 either way. The only question is what you compare that £20 against. Markup compares it to the cost — what you added on top. Margin compares it to the selling price — what slice of the sale you keep. Same £20, two different denominators, two different percentages.
Markup: profit over cost
Markup answers "how much did I add to my cost?" It is the natural way to price, because you begin with a cost you already know.
Example. Cost £40, price £60.
- Profit: £60 − £40 = £20
- Markup: £20 ÷ £40 = 0.50 = 50%
So you marked the item up by 50%. To set a price from a cost, this is the direction you work in: take the cost and add the markup. Adding a percentage on top is the same arithmetic as a percentage increase — £40 increased by 50% gives £60.
Margin: profit over price
Margin answers "of the money that came in, how much did I keep?" It is the honest measure of profitability, because it is expressed against the revenue you actually banked.
Example. The same sale — cost £40, price £60.
- Profit: £20
- Margin: £20 ÷ £60 = 0.333 = 33.3%
Notice the same £20 profit is a 50% markup but only a 33.3% margin. Because the price is always larger than the cost, margin is always the smaller of the two. That gap is precisely where businesses fool themselves.
The costly mix-up: a shop wants a "40% profit," marks everything up 40%, and assumes it keeps 40% of revenue. It does not. A 40% markup is only a 28.6% margin — the other 11 points vanished into the difference between the two bases. Repeated across thousands of sales, that gap is the difference between a healthy year and a worrying one.
Converting between them
You can switch between the two without knowing the actual pounds, using just the percentages:
| Markup | Equivalent margin |
|---|---|
| 10% | 9.1% |
| 25% | 20% |
| 50% | 33.3% |
| 100% | 50% |
| 200% | 66.7% |
The popular "keystone" pricing — doubling the cost — is a 100% markup, which is a 50% margin. The two numbers only meet at zero.
When to use which
The practical rule: price with markup, report with margin. When you are setting a price you start from cost, so markup is the natural tool — add your target percentage to what the item cost you. When you are judging how the business is doing, margin is the truth, because it tells you what fraction of every sale survives as profit. The two views work together: markup builds the price, margin grades the result. To find the sales volume where those margins finally cover your fixed costs, pair this with the break-even calculator.
Gross margin isn't the whole story
One caution: the margin above is gross margin — it only subtracts the direct cost of the product. Rent, wages, software, marketing, and tax all come out afterwards. A business can show a fat gross margin and still make no net profit once the overheads are paid. So treat margin as the first number you check, not the last. When you are weighing whether a price cut or a cost saving does more for the bottom line, the cost reduction calculator and the discount calculator let you test the effect on margin before you commit.
The one-line summary
Markup is profit divided by cost; margin is profit divided by price. Markup is always the bigger percentage. Use markup to build a price, margin to measure what you keep, and never assume one is the other. Keep the markup calculator and profit margin calculator side by side and you will never confuse them again.
Frequently asked questions
Is markup or margin the bigger number?
Markup is always the larger figure for the same sale, because it divides profit by the smaller cost rather than the larger selling price. A 50% markup is only a 33% margin. Whenever someone quotes a percentage, it's worth asking which one they mean.
How do I convert markup to margin?
Divide the markup by one plus the markup. A 50% markup becomes 0.50 ÷ 1.50 = 0.333, or a 33.3% margin. To go the other way, divide the margin by one minus the margin: a 40% margin is 0.40 ÷ 0.60 = 0.667, a 66.7% markup.
Which one should I price with?
Price with markup, because you start from a known cost and add to it. But measure performance with margin, because it tells you what share of each sale you actually keep. Most businesses set prices by markup and then report results by margin.
What's a good profit margin?
It depends entirely on the industry. Grocery retail runs on single-digit margins by selling huge volume; software can exceed 80% because each extra copy costs almost nothing. Compare your margin to similar businesses, not to a universal target.
Does margin account for all my costs?
Gross margin only subtracts the direct cost of the goods sold. It ignores rent, salaries, marketing, and tax. A healthy gross margin can still leave no net profit once overheads are paid, which is why it's only the first number to look at, not the last.