Margin and Markup Are Not the Same Number
Both describe the same profit. They differ in what they divide it by:
Margin = (Price − Cost) / Price Markup = (Price − Cost) / Cost
An item costing $60 and selling for $100 carries $40 of profit. That is a 40% margin and a 67% markup. Confusing the two is one of the most common and most expensive mistakes in small business pricing — a retailer who applies a 40% markup while believing they have a 40% margin is under-earning by a third.
Margin and Markup Chart
| Margin | Equivalent markup | Price multiplier |
|---|---|---|
| 10% | 11.1% | 1.11× |
| 20% | 25.0% | 1.25× |
| 25% | 33.3% | 1.33× |
| 30% | 42.9% | 1.43× |
| 40% | 66.7% | 1.67× |
| 50% | 100.0% | 2.00× |
| 60% | 150.0% | 2.50× |
| 75% | 300.0% | 4.00× |
Margin has a hard ceiling at 100%, which it can approach but never reach. Markup has none — a software product costing $1 to deliver and selling for $100 carries a 9,900% markup and a 99% margin.
Gross, Operating and Net Margin
- Gross margin — revenue minus the cost of goods sold. Measures the product itself.
- Operating margin — also subtracts rent, wages, marketing and overheads. Measures the business.
- Net margin — subtracts interest and tax as well. What is actually left.
Typical net margins by sector: grocery 1–3%, restaurants 3–6%, general retail 2–5%, software 20–40%. A grocer with a 25% gross margin and a software firm with a 25% net margin are in entirely different businesses.
Pricing From a Target Margin
To hit a specific margin, divide rather than multiply:
Price = Cost / (1 − Margin)
For a 40% margin on a $60 cost: 60 / 0.6 = $100. Multiplying by 1.4 gives $84, which is only a 29% margin. This single error accounts for a great deal of accidental under-pricing.
Frequently Asked Questions
Can margin exceed 100%?
No. It would require a negative cost. Markup can exceed 100% freely.
What margin should I target?
It depends entirely on the industry and on volume. High-volume, low-margin and low-volume, high-margin are both viable; the combination that fails is low volume with low margin.
How do discounts affect margin?
Severely, because they come entirely out of profit. On a 40% margin, a 10% discount removes a quarter of the profit — and requires a 33% increase in units sold simply to break even on total profit.