Profit margin & markup

The difference between profit margin and markup

Both margin and markup measure profitability, but they use different starting numbers:

• Profit margin is the share of your selling price that is profit: (Price - Cost) / Price x 100. It answers: for every dollar taken in, how many cents do you keep?
• Markup is the percentage added to your cost to reach that price: (Price - Cost) / Cost x 100. It answers: by what factor did you increase your cost?

A worked example

Imagine a product that costs you $40 to produce and you sell it for $100:

• Profit is $60 ($100 price minus $40 cost).
• Profit margin is 60% ($60 profit divided by $100 selling price).
• Markup is 150% ($60 profit divided by $40 cost).

Common mistakes

The most common pricing mistake is treating markup as margin. If you mark up a $50 item by 25%, you sell it for $62.50. Your profit is $12.50, but your margin is only 20% ($12.50 / $62.50), not 25%! If your overhead and marketing require a 25% margin, you would need to sell that item for $66.67. Also remember to include all packaging, shipping, and payment processing fees in your unit cost.