Margin vs markup, the eternal mix-up
Margin and markup describe the same £40 of profit from two different directions, and confusing them is one of the most expensive mistakes in small business pricing. Both start from profit, which is simply selling price minus cost. The difference is what you divide by:
Margin asks "what share of the money coming in is profit?", which is how accountants and investors think. Markup asks "how much did I add on top of the cost?", which is how buyers and shopkeepers think. Trades tend to quote markup out of habit, wholesalers price cost-plus, and accountants report margin, so whenever someone quotes you a bare percentage, ask which of the two they mean before building it into a spreadsheet. For any profitable sale, markup is always the larger number, and the gap widens as prices rise: a 50% margin is a 100% markup, and an 80% margin is a 400% markup. You can convert between them directly: markup equals margin divided by (1 minus margin), and margin equals markup divided by (1 plus markup), working in decimals. A few common pairs are worth memorising:
- 20% margin = 25% markup
- 25% margin ≈ 33.3% markup
- 40% margin ≈ 66.7% markup
- 50% margin = 100% markup
- 60% margin = 150% markup
Worked examples
Pricing for a target margin
The classic blunder is wanting a 60% margin and so adding 60% to the cost. That gives you a 60% markup, which is a much thinner margin than you intended. To hit a margin target, divide rather than multiply:
Do that across a whole product range and the difference between £50 and £32 is the difference between a healthy business and one that cannot work out where the money went.
Gross, net and the VAT trap
The figures here are gross: one product, its direct cost and its price. Net margin is what survives after rent, wages, marketing and everything else, and it is always lower. If you are VAT registered, work in VAT-exclusive numbers on both sides, because the VAT you add to invoices is collected for HMRC rather than earned, and counting it inflates the margin you think you are making. Negative results are shown too: if the selling price is below cost, the profit row goes negative and the margin tells you how badly the sale loses money. This is guidance, not accounting advice: for VAT rules and registration thresholds, see gov.uk.
Frequently asked questions
What is the difference between margin and markup?
Margin is profit as a percentage of the selling price, markup is profit as a percentage of the cost. Buy at £60 and sell at £100 and the £40 profit is a 40% margin but a 66.7% markup. Markup is always the bigger number for the same sale.
How do I price a product for a target margin?
Divide the cost by one minus the margin as a decimal. For a 60% margin on a £20 cost, that is 20 divided by 0.4, giving a selling price of £50. Adding 60% to the cost instead would give £32, which is only a 37.5% margin.
Can margin or markup go over 100%?
Markup can, easily: selling a £20 item for £50 is a 150% markup. Margin cannot exceed 100% on a normal sale, because profit can never be more than the selling price. Margin only approaches 100% as the cost approaches zero.
Should I use prices with or without VAT?
Work margins on VAT-exclusive figures if you are VAT registered. The VAT you charge belongs to HMRC, not you, so including it flatters the margin. Use the cost you actually pay (net of any VAT you reclaim) and your net selling price.
What counts as a good profit margin?
It varies hugely by sector. Supermarkets survive on low single-digit net margins, while software businesses can run gross margins above 80%. Compare against your own industry, and remember gross margin ignores overheads, so net margin is always lower.