Profit margin vs markup: the same sale, two different numbers
A 50% markup is a 33.33% margin. They describe one sale and they are never the same number, which is why pricing to the wrong one is the most expensive arithmetic mistake a small business makes.
The difference in one sentence
Both start from the same profit. What changes is what you divide it by: markup divides profit by your cost, and margin divides the same profit by your selling price. Because the selling price is the larger of the two, the margin is always the smaller percentage.
That is the whole of it. Everything else in this guide is a consequence of dividing by a bigger number.
One sale, measured both ways
Take a single item. You pay SAR 100 for it and you sell it for SAR 150.
- Cost
- SAR 100.00
- Selling price
- SAR 150.00
- Profit
- SAR 50.00
- Markup — profit ÷ cost
- 50 ÷ 100 = 50.00%
- Profit margin — profit ÷ price
- 50 ÷ 150 = 33.33%
The profit is SAR 50 either way. Only the percentage changes, and it changes because the divisor changes.
Enter those two numbers into the Profit Margin calculator and it returns all three figures at once — the profit in money, the margin and the markup — precisely so nobody has to remember which of the two percentages they were quoted.
The arithmetic
Three formulas cover every case. They are the ones the Business Calculator prints under its own results, so what you see on the page and what is below are the same working.
price − cost = profit
profit ÷ price × 100 = margin %
profit ÷ cost × 100 = markup %
The mistake that costs money
Here is how it happens. Someone decides the business needs a 40% margin. They open a spreadsheet, multiply every cost by 1.4, and publish the price list. What they have actually applied is a 40% *markup*, and a 40% markup is a 28.57% margin.
- What was done — cost × 1.4
- SAR 140.00
- Margin that actually produces
- 40 ÷ 140 = 28.57%
- Price that gives a true 40% margin
- SAR 166.67
- Shortfall per item
- SAR 26.67
Illustrative figures. The gap is 11.43 percentage points of margin on every item sold at that price, and it does not announce itself — the invoices all look fine.
To price *to* a margin rather than to a markup, divide instead of multiplying:
price = cost ÷ (1 − margin)
For a 40% margin on a SAR 100 cost: 100 ÷ 0.60 = SAR 166.67.
Converting between the two
If you only ever remember one thing from this page, make it the middle row of the first table: a 50% markup is a 33.33% margin.
| Markup | Margin | Price on a SAR 100 cost |
|---|---|---|
| 10% | 9.09% | SAR 110.00 |
| 20% | 16.67% | SAR 120.00 |
| 25% | 20.00% | SAR 125.00 |
| 50% | 33.33% | SAR 150.00 |
| 75% | 42.86% | SAR 175.00 |
| 100% | 50.00% | SAR 200.00 |
| 200% | 66.67% | SAR 300.00 |
| Target margin | Markup needed | Price on a SAR 100 cost |
|---|---|---|
| 20% | 25.00% | SAR 125.00 |
| 25% | 33.33% | SAR 133.33 |
| 30% | 42.86% | SAR 142.86 |
| 40% | 66.67% | SAR 166.67 |
| 50% | 100.00% | SAR 200.00 |
| 60% | 150.00% | SAR 250.00 |
Notice what the second table says about the high end: a 60% margin needs a 150% markup. Margins above 50% require the price to be more than double the cost, which is worth knowing before promising one.
Working it out in BuzPulse
Two of the seven calculators cover this, and which one you want depends on which number you already have.
You know the cost and the price — use Profit Margin
Open the Profit Margin calculator, enter the cost and the selling price, and read the profit, the margin and the markup together. Use this to check a price you have already been given.
You know the cost and the markup — use Markup
Open the Markup calculator, enter the cost and the percentage you intend to add, and it returns the selling price, the profit and what that markup works out to as a margin. Use this when you are setting a price from cost.
Carry the price into the quote or invoice
Once the price is settled, the Quotation Generator and the Invoice Generator take it as a line item. Both round money the same way the calculator does, so the totals agree rather than drifting by a cent.
Common mistakes
- Multiplying by 1 + the target margin. That applies it as a markup. Divide by 1 − the margin instead.
- Comparing your margin to a competitor's markup. The two numbers are not on the same scale, and the comparison will flatter whoever quoted the markup.
- Forgetting that a discount comes out of the margin, not the price. Take 10% off a SAR 150 item costing SAR 100 and the profit falls from SAR 50 to SAR 35 — a 30% cut in profit for a 10% cut in price. What a discount really costs works this through.
- Leaving delivery, payment fees and returns out of the cost. The margin is only as honest as the cost you fed it.
- Applying one blanket markup across everything. Items with different costs and different handling do not share a sensible percentage.
Frequently asked questions
- Is a 50% markup the same as a 50% margin?
- No. A 50% markup is a 33.33% margin. To get a 50% margin you need a 100% markup — the price has to be double the cost.
- Can a margin be more than 100%?
- No. Margin is profit as a share of the selling price, and profit cannot exceed the price it came from, so it tops out just below 100%. Markup has no ceiling — an item costing SAR 1 and selling for SAR 100 carries a 9,900% markup and a 99% margin.
- Which number should I actually manage the business on?
- Margin, in most cases, because it tells you what share of your revenue you keep and it is directly comparable across products, months and businesses. Markup is the more convenient number at the moment you are setting a price from a cost.
- What happens if I sell below cost?
- The profit comes out negative and both percentages come out negative with it. The Profit Margin calculator flags the result as a loss rather than showing the figures without comment.
The tools behind this
Was this guide helpful?
About the author
Naeem Ahmed builds and runs BuzPulse. These guides describe tools he has built, and they describe how those tools actually behave — including where they stop.
Corrections and questions: nsglobal6@gmail.com
Read next
What a discount really costs: the number behind the percentage
Cut the price by 10% on a typical margin and you have given away 30% of the profit. You would then need to sell 43% more just to end up where you started.
How to calculate VAT — adding it, and taking it back out
Adding VAT is a multiplication. Taking it back out of a tax-inclusive price is not a subtraction — that is where most of the mistakes are, and where a cent goes missing from the invoice.