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Markup Is Not Margin

level 4 course

Two ways to describe the same profit, and how to price for a target.

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the lesson

The idea, the techniques and a tip for each skill, right here. The Learn page adds worked examples for every skill and untimed practice.

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The idea

Markup and margin describe the same profit as a percent of two different numbers. Markup divides the profit by the cost. Margin (gross margin) divides it by the price.

An item that costs $100 and sells for $150 makes $50. That is a 50% markup (50 out of 100) but only a 33.3% margin (50 out of 150). When the price is above the cost, the margin is always the smaller of the two.

Mixing them up is expensive. A shop that wants a 40% margin but adds 40% to its costs ends up with about 28.6%.

Techniques

Profit first, then the base

Any markup or margin question.

  1. Find the profit: price minus cost.
  2. Markup divides the profit by the cost. Margin divides it by the price.
  3. Before you divide, say the base out loud: "of cost" or "of price".
worked example

Example: A lamp costs the shop $60 and sells for $80. What is its gross margin?

  1. Profit: $80 − $60 = $20.
  2. Margin divides by the price: $20 ÷ $80 = 0.25 = 25%.
  3. For comparison, the markup is $20 ÷ $60 ≈ 33.3%.

Answer: 25%

Pretend the cost is $100

Turning a markup into a margin, with no amounts given.

  1. Say the cost is $100.
  2. Add the markup to get the price: a 50% markup makes the price $150.
  3. Margin is the profit divided by that price.
worked example

Example: A shop marks everything up 25% on cost. What is its gross margin?

  1. Cost $100, price $125, profit $25.
  2. $25 ÷ $125 = 0.2 = 20%.

Answer: 20%

Price for a target margin

You know the cost and the margin you want.

  1. A 25% margin means the cost is the other 75% of the price.
  2. Divide the cost by that share, written as a decimal.
  3. Check: the profit divided by your price should give the target margin.
worked example

Example: A job costs $300. What price gives a 25% gross margin?

  1. The cost is 75% of the price.
  2. $300 ÷ 0.75 = $400.
  3. Check: $400 − $300 = $100, and $100 ÷ $400 = 25%.

Answer: $400

Tips by skill

  • TipGross margin %: Margin divides the profit by the price, the bigger number.
  • TipMarkup %: Markup divides the profit by the cost, the smaller number.
  • TipConvert markup to margin: Pretend the cost is $100. The markup gives you the price. Then divide the profit by that price.
  • TipPrice for a target margin: The cost is the part of the price that is not margin. For a 40% margin that is 60%, so divide the cost by 0.6.
  • TipWhich is markup, which is margin?: Work out both. Profit ÷ cost is the markup; profit ÷ price is the margin. The markup is the bigger one.

Watch out for

  • Calling a 50% markup a 50% margin. On a $100 cost the price is $150, and $50 out of $150 is a 33.3% margin.
  • Dividing by the cost when the question asks for margin. Margin always divides by the price.
  • Adding the margin to the cost. $300 plus 25% is $375, which is only a 20% margin.

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