Margin vs markup: the most expensive confusion in pricing
You buy a product for $60 and sell it for $100. Your profit is $40 — but is that a 40% margin or a 66.7% markup? Both, depending on the base. Margin divides profit by the selling price ($40 ÷ $100 = 40%). Markup divides profit by the cost ($40 ÷ $60 = 66.7%). Businesses that set prices by "adding a 40% margin" when they actually add a 40% markup quietly underprice everything: that product would sell for $84, earning a true margin of only 28.6%. This calculator always shows both numbers so the confusion cannot survive.
The formulas
The second formula is the one pricing decisions need: to keep a true 40% margin on a $60 product, you must charge $60 ÷ 0.60 = $100 — not $60 × 1.40 = $84. Margin can never reach 100% (that would require zero cost), while markup is unlimited.
What margin should you target?
- Retail: gross margins commonly 25–50%, depending on category and turnover.
- Restaurants: food cost targets imply ingredient margins near 65–70% before labor and rent take their share.
- Software/services: gross margins of 70–90% are common because delivery cost per customer is low.
- Whatever your industry: gross margin must cover operating expenses and still leave profit — work backward from your costs, and use the Break-Even Calculator for volume.
Worked example
Cost $60, price $100: profit $40, margin 40%, markup 66.67%. If you actually wanted only a 40% markup, the price would be $84 and the margin 28.57%. Same shelves, same product — a $16-per-unit difference created purely by which word someone used in the pricing meeting.
How to use this calculator
- Enter the full cost of one unit — materials, production or wholesale price, plus per-unit costs you include in gross margin.
- Enter the selling price.
- Read margin and markup side by side and make sure any quote you give uses the right word.
- Set a target margin to get the exact price that delivers it.
Gross margin vs net margin
This page computes gross margin — price minus the direct cost of the product. Net margin subtracts rent, salaries, marketing and everything else from the whole business, and is always lower. Healthy businesses watch both: gross margin for pricing decisions, net margin for survival.