Since the terms can be used interchangeably, knowing how to calculate margin vs markup can be tricky. They’re both measures of profitability, usually expressed as a percentage, but markup measures how much you’ve increased prices relative to cost, while margin represents what proportion of a sale is profit.
If that still sounds confusing, don’t worry. In this article, we’ll walk you through the formulas, provide examples that clearly define the difference, and discuss some advanced use cases for margin and markup.
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How to Calculate Markup and Margin Formula
Understanding margin and markup is important for ensuring profitably set prices. If they’re too low or too high, this can result in lost sales or revenue. But before we learn to calculate markup vs margin, there are some essential definitions we need to cover.
Revenue is the money your company earns from selling products or services.
Cost of goods sold (COGS) is the total direct cost of producing a good or service. This may include raw materials, equipment, and wages paid to workers directly involved in the process.
Operating expenses include all indirect costs of running a business, such as rent, marketing, and administrative costs.
Gross profit refers to revenue left over after deducting COGS.
Operating profit measures profit after removing both COGS and operating costs.
Net profit is the truest measure of profit, representing what remains after deducting all business expenses.
For more detailed information, read our article on net vs. gross income.
Margin vs Markup
While both measure profitability, you might be wondering how to differentiate between margin vs markup.
Margin helps you understand profit as a portion of your selling price:
- Shows what percentage of revenue becomes profit
- Used for financial statements and comparing profitability
- Easier to evaluate financial health
- Example: A 25% margin means $25 profit from each $100 sale
Markup shows how much you’ve increased cost to set prices:
- Reveals the multiplier applied to your costs
- Used for pricing decisions and inventory valuation
- Better for quick price calculations
- Example: A 33.33% markup on $75 cost creates that same $100 sale price
| Quick tip: Higher markup percentages yield smaller margins than you might expect. A 50% markup only produces a 33.33% margin – a common source of pricing errors. |
How Do You Calculate Margin?
Profit margin is a ratio that measures how much your business earns on a product or service. The term has many variations: net profit margin, operating profit margin, unit margin, and gross profit margin. We’ll cover each of these below, but when financial professionals talk about “margin,” they usually refer to gross margin: profit from a sale after deducting COGS.
Margin Formula
The margin calculation formula yields percentage profit by deducting costs from revenue, dividing by revenue, then multiplying by 100.
Margin = (Revenue – Costs)/Revenue x 100
Knowing how to work out margin is more complicated than this formula might suggest. Depending on what’s included, there are many different margins, each providing unique insights into your business.
How Do You Calculate Markup?
While margin shows how much profit you’re making as a percentage of revenue, markup shows similar information as a percentage of cost. Markup calculations are an essential tool for financial modeling, allowing business owners to determine how many sales and at what price they’ll need to reach different levels of profitability.
Markup Formula
Markup refers to how much a single unit’s price is increased over its cost. The markup formula deducts costs from the sale price, then divides by cost, and finally multiplies by one hundred.
Markup = (Sale Price – Cost)/Cost x 100
Markup vs Margin Formula Examples
Sometimes, it’s easier to learn through an example than a formula or definition.
Let’s suppose your company white labels software as part of a comprehensive services package. Your clients could go directly to the supplier, but it’s easier to go through you since you manage other aspects of their business as well.
Since markup is usually calculated on a per-unit basis, we’ll do a unit margin calculation as well. Your supplier charges $70 per user and you charge customers $100. After running calculations through their respective formulas, you discover that you’re charging a 42% markup while running a 30% margin.
Markup to Margin Calculator: Converting Between the Two
Need to convert markup to margin or vice versa? Follow these steps. We’ll use the same figures as our previous example, starting with a margin of 30%
How to Calculate Margin From Markup
To calculate margin from markup, follow a similar process as above, but in reverse. We’ll start with a margin of 42%.
Following these steps should give you an idea of how margin and markup work together. Once you’re dealing with larger numbers in your business, it will make sense to use a spreadsheet. Additionally, accounting software may have features that can do margin-to-markup calculations for you.
Keep in mind that making these calculations in the real world will involve more than in our examples. A hurdle many business owners face is a lack of quality data. Sometimes they’re commingling funds between their business and personal life. Other times, they don’t have a method for tracking business expenses. If these challenges sound familiar, schedule a consultation with an indinero accounting services team member. We’d be delighted to help implement an easy-to-use system for your business.
Convert Margin to Markup
Imagine you’re a SaaS reseller who knows you want a 25% margin on each license. How do you quickly determine the markup needed to achieve that target? Here’s a shortcut formula that saves time:
Markup = Margin ÷ (1 – Margin) × 100
So for a 25% target margin: 0.25 ÷ (1 – 0.25) × 100 = 33.33% markup
This means you need to mark up your costs by 33.33% to achieve a 25% margin. Some other common conversions:
- 20% margin = 25% markup
- 30% margin = 42.86% markup
- 40% margin = 66.67% markup
- 50% margin = 100% markup
Notice how the markup percentage grows exponentially compared to the margin? This counterintuitive relationship trips up many business owners who mistakenly use margin percentages when they should be using markup, potentially underpricing their products.
Pro tip: Keep a “cheat sheet” of these conversions handy when doing quick pricing calculations. It’s faster than running the full formulas each time, especially during negotiations or when making rapid pricing decisions.
This aligns with our previous examples while adding actionable conversion insights for practical business use. Want help implementing strategic pricing? Our virtual CFOs can guide you through optimizing your margins and markups.
How to Use Markup and Margin In Your Business
In January 2024, the NYU Stern School of Business compiled a margin analysis of over 6,000 businesses across nearly one hundred sectors. We’ve pulled a handful below.
Start by comparing your company to industry averages. If they differ, ask yourself why.
Are you charging enough for products?
Are your costs too high?
What strategies can you implement to improve margins?
These are the sorts of questions indinero virtual cfo, Brian Johnson, pursues every day. Here’s a firsthand experience he had with a client:
“We have a client who came to us when they were breaking even, and the founder was concerned about whether he was going to make it. We ran through a financial analysis of their margins and discovered that some of their products, after considering fixed costs and variable profits, weren’t making money. So over six months, we achieved profitability by cutting his cost structure and right sizing his business.”
Margin and markup analysis can also bring good news. If you’re outperforming the competition, it may be a good time to pursue an exit through a merger or acquisition, additional investment from venture capitalists, or further growth by applying for a business loan.
If you need help with this sort of analysis, accounting, or bookkeeping, contact an indinero virtual CFO services expert today.
