Margin and markup formulas
Profit = Price − Cost
Gross margin = Profit ÷ Price × 100
Markup = Profit ÷ Cost × 100
Price for a target margin = Cost ÷ (1 − Margin ÷ 100)
Margin is not the same as markup
Both measure profit, but against different numbers. Margin compares profit with the selling price. Markup compares profit with the cost. A product that costs 40 and sells for 60 has a profit of 20, which is a 33.3% margin but a 50% markup. Mixing them up is one of the most common pricing mistakes in small businesses, and it usually leads to prices that are too low.
Worked example
A candle shop pays 40 for each gift box and wants a 35% margin. The price is 40 ÷ (1 − 0.35) = 61.54. Profit is 21.54 per box. To get there from the cost, the owner needs a markup of 53.8%, not 35%. If they had simply added 35% to the cost, the price would be 54 and the margin only 25.9%.
Quick reference
| Target margin | Markup needed |
|---|---|
| 10% | 11.1% |
| 20% | 25% |
| 25% | 33.3% |
| 30% | 42.9% |
| 40% | 66.7% |
| 50% | 100% |
Gross margin vs net margin
This calculator works out gross margin, which only counts the direct cost of the product. Net margin also subtracts rent, wages, marketing and tax. A healthy gross margin is what pays for those running costs, so it should always be well above the net margin you hope to keep. To see how many sales cover your running costs, use the break-even calculator.
Should cost include VAT?
If you are VAT registered, use prices without VAT for both cost and selling price, because you reclaim VAT on purchases and pass it on to the tax office on sales.
Frequently asked questions
What is a good profit margin?
It depends on the industry. Grocery shops often run on single-digit net margins, while software companies can have gross margins above 70%.
How do I convert markup to margin?
Margin = Markup ÷ (100 + Markup) × 100. A 50% markup equals a 33.3% margin.
Can margin be more than 100%?
No. Margin is a share of the price, so it can't exceed 100%. Markup can be any size.
Why does the target margin tool reject 100%?
A 100% margin would mean the product costs nothing, so no finite price can reach it.
Should I include shipping in the cost?
Yes, if you pay it for each order. Include every cost that comes with selling one more unit.
Last reviewed on by the Dailycaltor team.