How to Calculate Profit Margin and Markup (With Examples)
Margin and markup describe the same profit two different ways — and confusing them is one of the most expensive everyday mistakes in small-business pricing. Quote a job using markup maths while thinking in margin, and you will undercharge on every single invoice.
The two formulas
- Margin = (price − cost) ÷ price × 100. Profit as a share of what the customer pays.
- Markup = (price − cost) ÷ cost × 100. Profit as a share of what it cost you.
Because the denominators differ, markup is always the bigger number for the same transaction.
A worked example
Buy something for $60 and sell it for $100. The profit is $40.
- Margin: 40 ÷ 100 = 40%.
- Markup: 40 ÷ 60 = 66.7%.
Same sale, same profit — two very different percentages. If you aimed for a "40% markup" believing it was a 40% margin, you would price at $84 instead of $100 and give up $16 per sale.
Pricing from a target margin
To hit a chosen margin, divide the cost by (1 − margin). For a 40% margin on a $60 cost: 60 ÷ 0.6 = $100. Note the ceiling: a 100% margin is impossible, because it would mean the cost was zero — and a 90% margin means pricing at ten times cost. The Profit Margin Calculator does both directions instantly.
What is a good margin?
There is no universal number. Grocery and restaurants often run on single-digit net margins; many services and digital products run far higher gross margins. What matters is whether your margin, multiplied by realistic sales volume, covers your fixed costs — which is exactly what a break-even calculation tells you.
Common mistakes
- Using markup and margin interchangeably in quotes, spreadsheets and staff instructions.
- Forgetting costs beyond the product — delivery, packaging, platform fees and your time all belong in "cost" for a true margin.
- Discounting without recalculating. A 20% discount on a 40% margin product does not leave a 20% margin — it leaves about 25% of the original price as profit before other costs. Run the numbers again after any discount.
Frequently asked questions
Is a 50% markup the same as a 50% margin?
No. A 50% markup on a $60 cost gives a $90 price and a 33.3% margin. A 50% margin on a $60 cost needs a $120 price — a 100% markup.
Which one should I use for pricing?
Use margin for targets (it connects cleanly to your accounts, where profit is expressed against revenue), and be careful to say which one you mean whenever a percentage is quoted.
Does this apply to services as well as products?
Yes. For services, "cost" is your labour, materials and any subcontracting for that job. The margin formula is identical.
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