The simple difference between gross margin and markup, and how to set prices without losing money by mixing them up.
Quick answer: Gross margin shows profit as a percentage of the selling price, whereas markup shows profit as a percentage of the cost. An item that costs $60 and sells for $100 has a 40% gross margin but a 66.7% markup. Both use the same $40 profit, but they measure it against different numbers, so the percentages are never the same.
Plenty of business owners use these two words as if they mean the same thing. They do not, and the mix-up can cost real money. If you want a 40% margin but you add 40% to your cost, you will earn far less than you planned.
This guide gives you the formulas, some worked examples, and a simple chart to move between margin and markup. You will also see when to use each one in your day-to-day pricing and reporting.
In this article
- What is the difference between gross margin and markup?
- How do you calculate margin and markup?
- How do you convert between margin and markup?
- How do you set a price from a target margin?
- When should you use margin and when should you use markup?
- What are the limits of these numbers?
- Frequently asked questions
- Final thoughts
What is the difference between gross margin and markup?
Both measures start with gross profit, which is your selling price minus the direct cost of what you sold. The difference is what you divide it by.
| Gross margin | Markup | |
|---|---|---|
| Compares profit to | Selling price (revenue) | Cost (COGS) |
| Formula | (Price − Cost) ÷ Price × 100 | (Price − Cost) ÷ Cost × 100 |
| $60 cost, $100 price | 40% | 66.7% |
| Can it reach 100%? | Never, unless the cost is zero | Yes, and it can go above 100% |
| Used most for | Reports, comparing performance, investors | Setting prices from a known cost |
Margin will always be a lower percentage than markup for the same profitable sale, because the selling price is always larger than the cost.
How do you calculate margin and markup?
1. Work out your gross profit
Subtract your cost from your selling price. A bicycle that costs $150 and sells for $200 gives a gross profit of $50.
2. Work out gross margin
Divide the profit by the selling price: $50 ÷ $200 = 0.25, or a 25% gross margin.
3. Work out markup
Divide the profit by the cost: $50 ÷ $150 = 0.333, or a 33.3% markup.
Make sure your cost figure includes all the direct costs, such as materials, shipping to you and any direct labor. If you leave some out, both your margin and your markup will look healthier than they really are.
How do you convert between margin and markup?
You can switch from one to the other without knowing the actual prices, using decimals in these formulas:
- Markup to margin: Margin = Markup ÷ (1 + Markup)
- Margin to markup: Markup = Margin ÷ (1 − Margin)
Here are some common values, rounded to one decimal place.
| Markup | Gross margin |
|---|---|
| 20% | 16.7% |
| 25% | 20% |
| 33.3% | 25% |
| 50% | 33.3% |
| 66.7% | 40% |
| 100% | 50% |
| 150% | 60% |
| 200% | 66.7% |
A helpful number to remember is that a 100% markup, which doubles your cost, gives only a 50% margin.
How do you set a price from a target margin?
If you already know the margin you need, do not add it to your cost as a percentage. Divide instead:
Selling price = Cost ÷ (1 − Target margin)
For a $60 item and a 40% target margin, the price is $60 ÷ 0.60 = $100. To set a price from a markup instead, multiply: Price = Cost × (1 + Markup).
A shop owner wants a 40% margin on a jacket that costs $60. She adds 40% to the cost and prices it at $84. Her profit is $24, and her true margin is $24 ÷ $84, or 28.6%. The correct price is $100, with a $40 profit. Across 1,000 jackets, the error costs her $16,000 in gross profit, if she sells the same number at either price.
Of course, you can’t choose a price using math alone. You also need to check what customers will pay and what rivals charge. A price that hits your margin target but scares away buyers won’t help your business.
When should you use margin and when should you use markup?
- Use markup for quick pricing: It works well when you buy goods at a known cost and need a fast, consistent way to set prices, as many retailers do.
- Use margin for reporting: It shows how much of each sales dollar you keep, so it fits with a profit and loss statement. Read our guide on how to read a profit and loss statement.
- Use margin to compare: You can compare products, time periods or competitors more easily, since margin is measured against sales.
- Use both in a team: Agree on one term for each task, and always state which you mean. Saying “30%” with no label can cause costly mistakes.
A wholesaler tells a new sales rep to keep deals above “30%”. The rep thinks this means markup, but the owner means margin. A 30% markup gives only a 23.1% margin, so several deals come in well below target before anyone notices. A clear written pricing rule fixes the problem.
What are the limits of these numbers?
Gross margin and markup are useful, but neither one tells you the whole story.
- They ignore overheads: Rent, wages, software and marketing all come out of gross profit. A strong gross margin can still leave you with a net loss.
- They hide the effect of volume: A low-margin product that sells in high volumes can bring in more profit than a high-margin item that rarely sells.
- Costs change: If your supplier raises prices and you do not update your prices, your margin shrinks without you noticing.
- Discounts hit margin hard: A 20% discount on an item with a 40% margin cuts your profit per sale in half: a $100 item that costs $60 sells for $80, which leaves $20 instead of $40.
Normal margins differ widely by industry, so compare yourself with similar businesses rather than a single general rule. If you are short of cash because customers pay slowly, our guide to invoice factoring vs a line of credit may help.
Pick your three best-selling products and write down the cost and price of each. Work out the gross margin and the markup for all three. If any of them is lower than you expected, check your costs, then think about your price or supplier.
Frequently asked questions
Is gross margin the same as markup?
No. Margin compares profit to the selling price, while markup compares it to the cost. The same sale always gives a different percentage for each one.
Is a 50% markup the same as a 50% margin?
No. A 50% markup gives a 33.3% margin. You need a 100% markup to achieve a 50% margin.
Can gross margin be more than 100%?
No. Even if an item costs nothing, the margin reaches only 100%. Markup can be far above 100%, however.
How do I calculate a 30% margin?
Divide the cost by 0.70. An item that costs $70 needs a price of $100 for a 30% margin. That is about a 42.9% markup.
Which is better, margin or markup?
Neither is better. Markup is handy for setting prices from cost, and margin is better for reports and comparisons. Just be clear about which one you are using.
What is a good gross margin?
It depends on your industry and your costs. Compare yourself with similar businesses, and make sure your gross profit covers your overheads and leaves a profit.
Final Thoughts
- Margin measures profit against price. Markup measures profit against cost.
- Divide by (1 − margin) to set a price from a target margin.
- A 100% markup gives only a 50% margin.
- Always state which number you mean, and review your costs regularly.
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- Invoice Factoring vs Line of Credit
- How to Start a Small Embroidery Business
- How to Start a Small Clothing Business From Home