Markup is profit as a percentage of cost; margin is the same profit as a percentage of the selling price. An item costing 40 and selling at 60 makes 20 of profit, which is a 50 per cent markup and a 33.3 per cent margin. Neither figure is wrong and they are never equal above zero, because the denominators differ.
The confusion persists because different trades habitually speak in different terms. Wholesale and manufacturing quote markup, because they start from cost. Retail and finance quote margin, because they start from revenue and it is what appears on a profit and loss statement.
How do the two convert?
Markup equals margin divided by one minus the margin, and the gap widens as the numbers grow.
| Margin | Markup | Multiplier on cost |
|---|---|---|
| 10% | 11.1% | 1.111 |
| 20% | 25% | 1.25 |
| 25% | 33.3% | 1.333 |
| 33.3% | 50% | 1.5 |
| 40% | 66.7% | 1.667 |
| 50% | 100% | 2.0 |
| 60% | 150% | 2.5 |
The last column is the practical output. Rather than converting percentages every time, a shop wanting a consistent 40 per cent margin can multiply every ex-VAT cost by 1.667 and be done. One number, easy to apply, easy to check, and it does not invite the confusion at all.
Note that margin can never reach 100 per cent while markup has no ceiling. A keystone markup — doubling the cost — is a 100 per cent markup and a 50 per cent margin.
Which figure should a business use?
Margin, for anything that touches the accounts, because it is the figure that composes with revenue. Gross margin percentages can be compared across products, added up by revenue weight, and read straight off a profit and loss statement. Markup percentages cannot.
Markup is the better working number at the point of pricing, because you are holding a cost and need a price. Using the multiplier column above gives you the markup arithmetic while thinking in margin terms, which is the combination most shops end up at.
What is the difference between gross and net margin?
What is subtracted. Gross margin is revenue less the direct cost of goods, divided by revenue. Net margin subtracts everything else as well — rent, wages, marketing, payment fees, returns, interest and tax.
Revenue of 250,000 against 150,000 of cost of goods gives 100,000 gross profit and a 40 per cent gross margin. If total costs are 235,000, net profit is 15,000 and the net margin is 6 per cent.
The gap between the two is the most informative number in a small business. A retailer running 45 per cent gross and 4 per cent net is spending 41 points of revenue on running the place, and that is where any improvement has to come from — a further point of gross margin is worth much less than a point off overheads.
What belongs in cost of goods sold?
The judgement call that makes gross margin comparable or useless. Direct materials and the labour that touches the product belong there; rent, the salaries of people who do not make the product, and marketing do not.
- In, normally: materials, direct labour, inbound freight, packaging that ships with the product.
- Out, normally: rent, admin salaries, marketing, outbound shipping, software, insurance.
- Arguable: payment processing fees, warehouse labour, returns handling.
The arguable ones matter less than being consistent about them. A gross margin that moves because the classification changed is a measurement problem rather than a business one, and it is why the definition should be written down once and left alone.
Where do payment fees and returns land?
Wherever you put them, as long as you keep putting them there. A card fee of 1.5 per cent and a return rate of 8 per cent are both material at retail margins, and moving either between cost of goods and overheads shifts the gross margin by several points without anything changing in the business.
The practical convention for an online seller is to treat payment fees and outbound shipping as overheads and the cost of returned stock as a cost of goods, because that keeps gross margin comparable with a shop that has neither. What matters is that a margin quoted to a lender, a buyer or a board says which convention it used.
Why is my gross margin falling?
Four causes, and they need different responses.
- Input costs rose and prices did not follow.
- The mix shifted toward lower-margin products, with no individual margin changing at all.
- Discounting increased, which comes entirely out of margin.
- Something moved into cost of goods that was previously classified elsewhere.
The mix explanation is the one most often missed, because every product line can look healthy while the blended figure falls. Checking margin by line before diagnosing anything is the fastest way to tell cause two from the others.
Questions people ask
What markup gives a 50 per cent margin? One hundred per cent — doubling the cost. It is the single most common conversion and the one people get backwards most often.
Should margin be calculated before or after VAT? Before, always. VAT is money collected for the state and passing through the business, and including it inflates both revenue and margin without anyone earning anything.
What is a good profit margin? Entirely sector-dependent. Grocery retail runs low single-digit net margins on high volume; software runs very high ones on low volume. The only useful comparison is against similar businesses and against your own last year.
Can net margin be negative? Yes, and it is not automatically a crisis — a growing business investing ahead of revenue can run negative net margin deliberately. It is a crisis when it is unplanned and the gross margin is also thin.
Pick one denominator, write it down, and use the multiplier so the conversion never comes up. The markup calculator and profit margin calculator work from cost and price, the gross margin and net margin calculators work from a set of accounts, and the margin to markup converter gives the multiplier for a target margin.