How markup and margin work
Markup and margin both describe the same profit on a sale, measured against different bases. Markup is the profit as a percentage of what the item cost you. Gross margin is the same profit as a percentage of what the customer paid. Because the selling price is always larger than the cost on a profitable sale, the margin percentage is always smaller than the markup percentage for the same item.
profit = price - cost markup % = profit / cost x 100 margin % = profit / price x 100 price from a markup = cost x (1 + markup / 100) price from a margin = cost / (1 - margin / 100)
The calculator accepts a cost plus any one of the three other quantities and fills in the rest. Enter a markup to price an item, enter a selling price to see what markup and margin you are actually getting, or enter a target margin to find the price that delivers it.
Worked example
The form defaults are a $50 cost with a 40% markup:
price = 50 x (1 + 40 / 100) = 50 x 1.40 = $70.00 profit = $70.00 - 50 = $20.00 margin = $20.00 / $70.00 x 100 = 28.57%
If instead you already sell that $50 item for $80, the profit is $30.00, the markup is 30 / 50 = 60%, and the margin is 30 / 80 = 37.5%. And if the goal is a 20% margin, the price must be 50 / (1 - 0.20) = $62.50, which is a 25% markup: the two percentages describe one price.
Markup to margin conversion
The two are linked by margin = markup / (1 + markup) and markup = margin / (1 - margin), with both expressed as decimals. Markup can exceed 100% without limit; margin can never reach 100%, because that would mean the item cost nothing.
| Markup | Margin | Price on a $50 cost | Profit |
|---|---|---|---|
| 5% | 4.8% | $52.50 | $2.50 |
| 10% | 9.1% | $55.00 | $5.00 |
| 15% | 13% | $57.50 | $7.50 |
| 20% | 16.7% | $60.00 | $10.00 |
| 25% | 20% | $62.50 | $12.50 |
| 30% | 23.1% | $65.00 | $15.00 |
| 40% | 28.6% | $70.00 | $20.00 |
| 50% | 33.3% | $75.00 | $25.00 |
| 75% | 42.9% | $87.50 | $37.50 |
| 100% | 50% | $100.00 | $50.00 |
| 150% | 60% | $125.00 | $75.00 |
| 200% | 66.7% | $150.00 | $100.00 |
Margin to markup conversion
Reading the relationship the other way shows why margin targets get expensive quickly: each extra ten points of margin needs a bigger and bigger jump in markup.
| Target margin | Markup needed | Multiply cost by |
|---|---|---|
| 10% | 11.1% | 1.111 |
| 20% | 25% | 1.25 |
| 25% | 33.3% | 1.333 |
| 30% | 42.9% | 1.429 |
| 40% | 66.7% | 1.667 |
| 50% | 100% | 2 |
| 60% | 150% | 2.5 |
| 75% | 300% | 4 |
Why the distinction matters
Suppose a shop owner wants to make 30% on everything and applies a 30% markup. Each sale then keeps only 23.1% of revenue as gross profit. If overhead runs at 25% of sales, the business loses money on every item while its owner believes it is earning 30%. The reverse mistake, applying a 30% margin formula when a 30% markup was intended, overprices goods by about 10% and can cost sales. Accountants report margin because it relates to revenue; buyers and merchandisers set prices with markup because it relates to cost. Convert explicitly whenever the two groups talk to each other.
Keystone and common markups
- Keystone pricing is a 100% markup: the retail price is double the wholesale cost, giving a 50% margin. It is the traditional starting point in clothing, gifts, and jewelry.
- Groceries typically carry 10% to 30% markups (9% to 23% margins) and rely on volume.
- Restaurants price menu items at roughly three to four times the ingredient cost, a 200% to 300% markup, to cover labor and rent.
- Contractors and repair shops mark up parts and materials 15% to 50% on top of labor.
Gross margin is before operating expenses. Net margin, what remains after rent, wages, marketing, and taxes, is usually a fraction of it: a retailer with a 50% gross margin might keep 3% to 8% net.