Margin vs. markup
- Gross margin – profit as a percentage of the selling price: (price − cost) ÷ price.
- Markup – profit as a percentage of cost: (price − cost) ÷ cost.
For an item that costs $60 and sells for $100, the profit is $40, the margin is 40% and the markup is 66.7%. The two numbers describe the same profit, so mixing them up is a common and costly pricing mistake.
Pricing for a target margin
To reach a target margin, divide the cost by 1 minus the margin. For a 50% margin on a $60 item, the price is $60 ÷ 0.5 = $120. A 50% markup, by contrast, would price it at $90, for only a 33% margin.
Frequently asked questions
What is a good profit margin?
It varies widely by industry. Grocery stores work on thin margins, while software and services can have much higher ones. Compare with businesses like yours.
What costs belong in "cost"?
For gross margin, include the direct cost of the product: materials, wholesale price, shipping in and direct labor. Rent and marketing are counted later, in operating margin.
Can margin be more than 100%?
No. Margin can approach but never reach 100%, while markup has no upper limit.