Margin vs markup: what's the difference?

By Adrian Simpson, who has priced jobs off both numbers, correctly and incorrectly, across more than 20 years running small web and IT businesses. Published August 2, 2026. Updated August 14, 2026.

Same profit, different math. Mix the two up and you'll price a job believing you made 30% when you really made 23%. Here's the difference, the formulas, and how to price from the number you actually want.

Same numbers, different question

A product costs you $60 and sells for $100. Your profit is $40 whichever word you use. What changes is what you compare that $40 against.

One sale, two numbers, neither of them wrong. Margin asks how much of the customer's money you keep. Markup asks how much you added on top of what you paid.

Which one do people mean?

Retailers and accountants usually mean margin. Suppliers, trades, and anyone quoting off a cost sheet usually mean markup. So when someone says they work on 50% and doesn't say which, ask. On that same $60 cost, 50% markup gets you $90. A 50% margin gets you $120. That's a $30 gap on a single item, and nobody notices until the year-end numbers come in soft.

The mistake that costs money

This is the one worth remembering. You want a 30% margin, so you add 30% to your cost.

You aimed for 30 and landed on 23. Seven points doesn't sound like much until you spread it across a year of sales. To actually hit the margin you want, divide instead of multiply.

Converting between the two

If you think in markup but report in margin, this saves you the arithmetic every time.

Both directions in formula form: markup = margin ÷ (1 − margin), and margin = markup ÷ (1 + markup).

What counts as cost

Before any of this math means anything you need the right cost, and this is where more calculations go wrong than in the formula itself.

Cost is what it takes to have the thing on hand and ready to sell. For a physical product that's the purchase price plus freight in, plus duty or import fees, plus anything you paid to get it packed or assembled. Buy a widget at $50 and pay $10 to get it shipped to you and your cost is $60, not $50. That's the landed cost, and it's the number to use.

What doesn't belong in there: rent, software subscriptions, your own salary, the van payment. That's overhead. It comes out of the profit margin measures, not out of the cost. Fold overhead into cost and you get something closer to a net margin, which is worth knowing, but it isn't what anyone means when they ask what margin you run.

Card fees are the awkward one. They're usually 2% to 3% of the sale, so they scale with the price rather than the cost. Most people leave them out and treat them as a drag on the margin instead. That works as long as you remember they're there. If nearly everything you sell goes through a card reader, folding them in gets you a truer number.

What a discount really costs

Margin is where discounts do their damage, because a discount comes straight out of profit. Your cost doesn't move.

Take that $100 sale at a 40% margin. Knock 10% off and you're at $90. Cost is still $60, so profit drops from $40 to $30. A 10% discount just cost you a quarter of your profit.

It gets worse as margins thin out. At a 20% margin, 10% off halves your profit. At 15%, it takes two thirds of it. That's why "just give them 10%" is an expensive habit in low-margin work, and why volume rarely rescues a discount.

There's a follow-up question people skip. If a 10% discount takes a quarter of your profit, how much more do you have to sell to end up where you started?

Profit per sale fell from $40 to $30, so it now takes four sales to earn what three used to. That's 33% more volume for the same money, and that's at a comfortable 40% margin. At 20% margin the answer is 100% more. You'd have to double your sales to break even on giving 10% away.

Worth running before you agree to a price cut on a big order. The number is usually worse than it feels in the moment.

When your supplier raises prices

Costs go up and the reflex is to pass the increase along one for one. Supplier adds $6, so you add $6. That protects your profit in dollars and quietly shrinks your margin.

Back to the $60 cost and the $85.71 price that gave you a 30% margin. Your supplier moves you to $66.

The price has to move by $8.58, not $6, because the margin has to cover the higher cost as well. Two points on one item is nothing. Two points across a catalogue, every time a supplier moves, is how a business ends up wondering where the profit went. When you reprice after a cost increase, divide, don't add.

Margins on service work

None of this is only for people selling physical things. Services have margins too. The cost is just harder to see, so it often goes uncounted.

Your cost on a service job is whatever the job eats: the hours at what those hours actually cost you, plus materials, subcontractors, and anything bought specifically for it. Pay yourself or a staff member $40 an hour and a job takes 10 hours, that's $400 of cost before anything else lands on it.

Quote that job at $1,000 and you're looking at $600 profit, a 60% margin. Healthy. Now add $120 of materials and half a day of a subcontractor at $150. Cost is $670, profit is $330, and the margin is 33%. Same invoice, same customer, a very different business.

The trap in service work is treating your own time as free because no money leaves the bank account. It isn't free. If your hours don't carry a cost, every job looks profitable and you lose the ability to tell the good ones from the ones quietly eating your week.

Jobs with both materials and labor

Trades and anyone quoting mixed jobs hit a version of this that catches people out. You mark up materials at one rate and labor at another, then someone asks what margin you made on the job. It isn't either number, and it isn't the average of them.

Take a job with $2,000 of materials marked up 20%, and $3,000 of labor cost billed at 50% markup.

Neither 20% nor 50% shows up in the answer, and it shifts with the mix. Run the same two markups on a materials-heavy job and the blended margin lands lower, because the cheaper markup is carrying more of the total. Quote line by line if that's how you work, then work out the job cost, work out the job price, and divide once at the end.

What's a normal margin?

Benchmarks are worth knowing, if only so you can tell whether you're miles off.

General retail often sits near 50% margin, which is where the old "keystone" rule comes from: double the cost, which is 100% markup and 50% margin. Grocery runs far thinner, often single digits, and makes it back on volume. Restaurants tend to aim for 65% to 70% on food and better on drinks, because labor and waste have to come out of that. Trades and construction commonly land at 15% to 25% net on a job, with fatter markups on materials than on labor. Freelance and consulting work, where time is the main cost, can show 60% and up on paper, though that flatters itself until you count the hours nobody paid for.

Treat all of those as rough. What you sell, where you are, and what your overhead looks like matter more than any industry average. They're a sanity check, not a target.

What margin leaves out

The margin in these examples is gross margin. It counts the cost of the thing you sold and nothing else. What you actually keep is smaller once you take out card processing at 2% to 3%, refunds, shipping you absorbed, and the hours you spent that nobody billed for.

A 40% gross margin can end up as a 12% net margin after rent, software, and tax. Both numbers matter. Gross margin tells you if the pricing works. Net margin tells you if the business does.

A few quick answers

Can margin go above 100%? No. Profit can't be more than the price you charged. Markup has no ceiling, which is why a 300% markup is a normal thing to hear and a 300% margin isn't.

Which should I price from? Margin, in almost every case. It's the number that ties to your accounts, and it's the one that tells you what's left when the money lands.

Should sales tax be in the price when I work out margin? No. Tax you collect isn't yours, you're holding it for someone else. Use the figure before tax on both sides of the calculation. Same for VAT if you're registered. The sales tax calculator will strip tax back out of a gross figure if you only have the total.

Is markup ever the more useful number? When you're quoting fast off a cost sheet, yes. Multiplying is quicker than dividing and cost is already the number in front of you. Just convert before you report anything, compare yourself to anyone, or set a target.

My margins look fine but there's no money in the bank. Why? Usually gross margin doing its job while overhead does its own. Gross margin can look healthy while rent, software, insurance, and unbilled hours quietly take all of it. Work out your net margin before you decide pricing is the problem.

What if I sell at a loss? The formulas still work, they just go negative. Sell a $60 item for $50 and the margin is −20%. Markup goes negative too, at −16.7%. Clearance stock and loss leaders live here on purpose, which is fine as long as it's a decision rather than a surprise.

Run your own numbers

The profit margin calculator does all of this, including working backwards from a target margin to the price you should charge. If you're quoting a job rather than pricing a product, the price quote calculator is the better starting point.

This is general guidance, not accounting or tax advice. For decisions that actually move money, check the numbers with a professional in your area.