Profit Margin vs Markup: What Is the Difference?
Shopkeepers, freelancers and online sellers often say "I make 25% on this", and it is not always clear what that means. It could be a margin or a markup, and the two give different numbers for the same sale. Mixing them up is one of the most common ways small businesses misprice their products.
The two definitions
- Markup is profit as a percentage of the cost: Markup % = Profit ÷ Cost × 100.
- Margin is profit as a percentage of the selling price: Margin % = Profit ÷ Selling price × 100.
Profit itself is the same in both: Profit = Selling price − Cost.
One sale, two answers
You buy an item for ₹800 and sell it for ₹1,000.
- Profit = ₹1,000 − ₹800 = ₹200
- Markup = 200 ÷ 800 × 100 = 25%
- Margin = 200 ÷ 1,000 × 100 = 20%
The profit is identical, yet one is 25% and the other is 20%. Margin is always smaller than markup for the same sale, because the selling price is larger than the cost.
Converting between them
- Margin = Markup ÷ (100 + Markup) × 100
- Markup = Margin ÷ (100 − Margin) × 100
A 25% markup gives 25 ÷ 125 = 20% margin. To earn a 40% margin you need a markup of 40 ÷ 60 = about 66.7%. This is why a seller who adds 40% to cost has only a 28.6% margin, which is a common surprise.
Pricing a product from a target
If you know the cost and the margin you want, use: Selling price = Cost ÷ (1 − Margin).
A product costs ₹600 and you want a 25% margin. Selling price = 600 ÷ 0.75 = ₹800. Check: profit is ₹200, and 200 ÷ 800 = 25%. If you had instead added 25% markup, you would have charged only ₹750, which is just a 20% margin.
Gross margin and net margin
The simple figures above are gross: they use only the cost of the goods. Your real take-home is lower after rent, salaries, delivery, payment fees, packaging, returns and GST handling. Before you set a price, list every cost per unit and add it to the product cost. A 20% gross margin can shrink to almost nothing after these are paid.
Losses and break-even
If you sell below cost, the same formulas give a negative number, which is a loss. A product bought at ₹1,000 and sold for ₹900 has a loss of ₹100, or 10% of cost. The break-even price is the cost plus every expense per unit. Selling at or above that price is the minimum for a sustainable business.
Discounts and margin
Discounts hit the margin harder than most people expect. On a 20% margin, a 10% discount takes the margin down to about 11% (selling at 90% of the price against the same cost). A 20% discount would wipe the profit out. Always check the margin after a promotion, not before.
Which one should you use?
Use markup when you are building a price from cost, and margin when you are judging how profitable a sale is or comparing against other businesses, since financial reports quote margin. Whichever you use, state it clearly, so everyone in the business means the same thing.
Our Profit and Loss Calculator shows the profit, markup and margin together for any cost and selling price, so you can see both at once.