Margin vs Markup: Pricing Without the Confusion

Margin and markup both describe the gap between what a product costs you and what you sell it for. They're built from the same two numbers — cost and price — but they measure that gap against different bases. Confusing them is one of the most common ways small businesses underprice themselves.

Markup — measured against cost

Markup is the profit expressed as a percentage of the cost. If an item costs you $40 and you add $20, that's a 50% markup ($20 ÷ $40). Markup answers: 'how much do I add on top of cost?'

Margin — measured against price

Margin is the same $20 profit expressed as a percentage of the selling price. Sell that item for $60 and your margin is 33% ($20 ÷ $60), not 50%. Margin answers: 'how much of each sale do I actually keep?'

Why the mix-up costs money

If you want a 40% margin but set a 40% markup by mistake, you'll charge too little — a 40% markup only yields about a 29% margin. Over hundreds of sales that gap is real money left on the table. Decide which one your target is, and price to it deliberately.

Which should you use?

• •Use markup when setting a price up from a known cost.
• •Use margin when judging how healthy a sale or a whole business is.
• •Retail and accounting usually talk in margin; buyers and suppliers often talk in markup.
• •Always confirm which one a quoted percentage refers to before you compare.