Markup vs Profit Margin: What's the Difference?
Understand the key differences between markup and profit margin, and learn when to use each one in your pricing strategy.
Markup and profit margin are two closely related concepts that many business owners confuse. While both deal with the relationship between cost and selling price, they are calculated differently and serve different purposes.
Markup
Markup is the amount added to the cost of a product to determine its selling price. It is expressed as a percentage of the cost.
Profit Margin
Profit margin is the percentage of the selling price that is profit. It is expressed as a percentage of revenue.
Key Difference
The fundamental difference is the base of the calculation:
- Markup is based on cost
- Margin is based on selling price (revenue)
Example
If a product costs $50 and sells for $80:
- Markup = ($80 − $50) ÷ $50 × 100 = 60%
- Margin = ($80 − $50) ÷ $80 × 100 = 37.5%
Same product, same profit — but very different percentages.
When to Use Each
- Use markup when deciding how much to add to your cost to set a price.
- Use margin when analyzing how much profit you keep from each sale.
Common Markup-to-Margin Conversions
| Markup | Margin |
| 25% | 20% |
| 50% | 33.3% |
| 100% | 50% |
| 200% | 66.7% |
Avoid This Common Mistake
Many business owners set a "50% margin" when they actually mean a "50% markup." A 50% markup on a $100 cost gives you a $150 selling price and a 33% margin. A true 50% margin requires a $200 selling price. This mistake can significantly impact your profitability.