Part of our complete guide to small business numbers.
The core confusion
Margin and markup both measure profit, but against different bases. Margin is profit as a percentage of your selling price, markup is profit as a percentage of your cost. Take an item costing £50 that sells for £100, profit is £50 either way, but margin is 50% (£50 profit ÷ £100 selling price), while markup is 100% (£50 profit ÷ £50 cost). Same transaction, same profit, two completely different percentages depending on which one you're using.
Key point: Markup is always a larger number than margin for the same transaction, except at very low profit levels. Treating the two as interchangeable, or using the wrong one in a pricing formula, is one of the most common and costly pricing mistakes small businesses make.
Where this actually costs businesses money
Say you want a 50% margin on a product. If you mistakenly apply a 50% markup to your cost instead, thinking the two are the same thing, your actual margin comes out at only 33%, not the 50% you intended. On volume, that gap compounds into a meaningful amount of lost profit, not because your prices were wrong on purpose, but because the formula used the wrong base.
Converting between the two
- Markup to margin: margin = markup ÷ (1 + markup). A 100% markup converts to a 50% margin
- Margin to markup: markup = margin ÷ (1 − margin). A 50% margin converts to a 100% markup
A quick reference: 25% margin is a 33% markup, 33% margin is a 50% markup, 50% margin is a 100% markup. Notice how the gap between the two widens as the percentage increases, this is exactly why the confusion gets more costly at higher target margins.
Which one should you actually use?
Margin is generally the more useful figure for understanding your business's overall profitability, because it's directly comparable to revenue, how much of each pound of sales is actually profit. Markup is more commonly used at the point of setting an individual price, cost plus a markup percentage, because you're starting from a known cost and working forward to a price. Use markup to set the price, then check the resulting margin to make sure it matches your actual profitability target.
Want your pricing checked properly? Try our margin vs markup calculator, or book a free consultation if you want your whole pricing structure reviewed.
Frequently asked questions
What is the difference between margin and markup?
Margin is profit expressed as a percentage of selling price, while markup is profit expressed as a percentage of cost. The same pound amount of profit produces two different percentages depending on which base you use.
Why does this confusion lead to under-pricing?
If you intend a 50% margin but mistakenly apply a 50% markup instead, your actual margin comes out at 33%, well below your target, because markup is always a smaller percentage than margin for the same profit amount.
How do I convert markup to margin?
Margin equals markup divided by (1 plus markup), expressed as a decimal. A 100% markup converts to a 50% margin, a 50% markup converts to a 33% margin.
How do I convert margin to markup?
Markup equals margin divided by (1 minus margin), expressed as a decimal. A 50% margin converts to a 100% markup, a 25% margin converts to a 33% markup.