"I add 50% on top of cost, so my margin is 50%." This is one of the most common pricing mistakes — markup and margin are calculated differently, and confusing them means a business can consistently price lower than it thinks it's pricing.
The Two Formulas
- Markup = (Selling Price − Cost) ÷ Cost × 100
- Margin = (Selling Price − Cost) ÷ Selling Price × 100
The difference is the denominator — markup is measured against cost, margin is measured against the selling price. Same profit amount, two different percentages.
Worked Example
A product costs 100 to make and sells for 150 (profit of 50):
- Markup = 50 ÷ 100 × 100 = 50%
- Margin = 50 ÷ 150 × 100 = 33.3%
Same 50 profit, but a 50% markup is only a 33.3% margin — a business assuming these are interchangeable will consistently underprice compared to their actual profit target.
Skip the Manual Math
The Profit Margin Calculator handles both directions — enter cost and selling price to get margin and markup, or enter cost and a target margin to find out what price to charge.
Why This Mistake Is So Common (and Costly)
- A business aiming for a "30% margin" but accidentally applying a 30% markup ends up with only about a 23% margin — a meaningful shortfall compounded across every sale.
- Comparing margin across products or against industry benchmarks only works if everyone is using the same definition — mixing markup and margin numbers makes comparisons meaningless.
- Setting prices off cost (markup) feels natural, but setting profit targets off revenue (margin) is usually what matches how a business actually thinks about profitability.
FAQ
Which one should I use to price my products?
Either can work, but be consistent and clear about which one you're using — margin is generally more useful for setting overall profitability targets since it's based on revenue.
What's a "good" profit margin?
It varies enormously by industry — retail margins are often much thinner than software or services margins, so compare against your specific industry rather than a universal number.
Does margin account for all business costs, or just the product cost?
Basic margin as calculated here only accounts for the direct cost of the product (gross margin) — overheads, salaries, and other expenses are a separate layer (net margin).