Markup Is Not Margin
Two ways to describe the same profit, and how to price for a target.
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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
- Find the profit: price minus cost.
- Markup divides the profit by the cost. Margin divides it by the price.
- Before you divide, say the base out loud: "of cost" or "of price".
worked example
A lamp costs the shop $60 and sells for $80. What is its gross margin?
- Profit: $80 − $60 = $20.
- Margin divides by the price: $20 ÷ $80 = 0.25 = 25%.
- For comparison, the markup is $20 ÷ $60 ≈ 33.3%.
Answer: 25%
Pretend the cost is $100
- Say the cost is $100.
- Add the markup to get the price: a 50% markup makes the price $150.
- Margin is the profit divided by that price.
worked example
A shop marks everything up 25% on cost. What is its gross margin?
- Cost $100, price $125, profit $25.
- $25 ÷ $125 = 0.2 = 20%.
Answer: 20%
Price for a target margin
- A 25% margin means the cost is the other 75% of the price.
- Divide the cost by that share, written as a decimal.
- Check: the profit divided by your price should give the target margin.
worked example
A job costs $300. What price gives a 25% gross margin?
- The cost is 75% of the price.
- $300 ÷ 0.75 = $400.
- Check: $400 − $300 = $100, and $100 ÷ $400 = 25%.
Answer: $400
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.
practice
Gross margin %
worked example
A chair costs the shop $584 and sells for $730. What is its gross margin percentage?
Answer: 20%
- Margin divides the profit by the price: ($730 − $584) ÷ $730 = $146 ÷ $730 = 20%.
Markup %
worked example
A lamp costs the shop $170 and sells for $238. What is its markup percentage?
Answer: 40%
- Markup divides the profit by the cost: ($238 − $170) ÷ $170 = $68 ÷ $170 = 40%.
Convert markup to margin
worked example
A furniture maker prices everything at a 25% markup on cost. What is its gross margin percentage? Round to one decimal place if needed.
Answer: 20%
- Imagine a $100 cost: the price is $125 and the profit is $25.
- Margin = profit ÷ price = $25 ÷ $125 = 20%.
Price for a target margin
worked example
Cost of goods sold for a print run is $1,205. What price gives a 75% gross margin?
Answer: $4,820.00
- Cost must be 25% of the price, so price = $1,205 ÷ 0.25 = $4,820.
- Check: ($4,820 − $1,205) ÷ $4,820 = 75%.
Which is markup, which is margin?
worked example
An item costs the shop $200 and sells for $250. Which statement is correct?
- Markup 20%, margin 20%
- Markup 25%, margin 20%
- Markup 25%, margin 25%
- Markup 20%, margin 25%
Answer: Markup 25%, margin 20%
- Profit is $50. Markup = profit ÷ cost = $50 ÷ $200 = 25%; margin = profit ÷ price = $50 ÷ $250 = 20%.
- When price is above cost, markup is the bigger percentage, because it divides the same profit by the smaller number.