Same profit, different base
An item that costs 60 and sells for 100 makes a profit of 40. Margin and markup describe that 40 as a percentage of different things:
- Margin is profit as a percentage of the price: 40 ÷ 100 = 40%.
- Markup is profit as a percentage of the cost: 40 ÷ 60 = 66.7%.
Markup is always the larger number. Confusing the two is a common way to underprice: adding a 40% markup to a cost of 60 gives 84, a margin of only 28.6%.
Converting
- Markup = margin ÷ (1 − margin). A 40% margin is a 66.7% markup.
- Margin = markup ÷ (1 + markup). A 50% markup is a 33.3% margin.
Price for a target margin
Price = cost ÷ (1 − margin). For a 40% margin on a cost of 60: 60 ÷ 0.6 = 100.
Break-even
With fixed costs of 6,000 a month, a price of 25 and a variable cost of 10 per unit, each sale contributes 15, so you need 6,000 ÷ 15 = 400 units a month to break even.
Calculators
The Profit Margin and Markup Calculator works either way, the Break-Even Calculator finds the units and revenue to cover costs, and the Discount Calculator shows what a sale price does.
Margin to markup at a glance
| Margin | Markup |
|---|---|
| 10% | 11.1% |
| 20% | 25% |
| 25% | 33.3% |
| 30% | 42.9% |
| 40% | 66.7% |
| 50% | 100% |
| 60% | 150% |
What a discount does to profit
Take the item that costs 60 and sells for 100. A 20% discount brings the price to 80, so the profit drops from 40 to 20 and the margin from 40% to 25%. Profit per sale has halved, so you need to sell twice as many to make the same profit.
Gross and net margin
Gross margin counts only the cost of the goods. Net margin also takes off rent, wages, marketing and the other running costs, so it is always lower. A shop with a 40% gross margin may have a net margin of 5 to 10%.