25 March 2025
Markup vs margin: what’s the difference?
5 minutes
With all the thrills that come with starting a new business, there’s also a lot of new terminology to learn. Case in point? Markup vs. margin.
So what’s the difference between markup and margin?
The first thing is that they are both accounting terms that have to do with the price of the items you sell. The second is that it’s not one or the other. Both are relevant to a transaction: markup to pricing an item for sale, and margin (or profit margin) to the money generated from that sale.
We’ll take you through the details.
The difference between markup and margin
The terms markup and margin are closely related and as a result, are often used interchangeably. However, knowing the subtle differences between them is crucial to ensuring you price items favourably and measure your success accurately.
Here are the simple definitions:
- Markup is how much you increase the cost of an item to get its selling price. To do so, you must account for your business’s overhead and the profit you want to make.
- Margin is how much profit you generate from the sale of an item. It’s also known as profit margin.
Should I use markup or margin?
The quick answer is:
- Are you determining your selling price? Use markup to work it out.
- Are you determining how much of the money you generate from a sale is profit? Use margin.
An important distinction is in the calculation of the two. They are both reflected as percentages:
- Markup is a percentage of the cost of your goods (cost price).
- Margin is a percentage of the actual income generated from your goods (sales price).
Knowing the difference between markup and margin has important implications for your company’s accounting and financial decision-making.
If you get the two terms confused, you could land up pricing your items too low and lose out on profit or too high and lose out on sales. Alternatively, you could land up thinking that you’ve made more (or less) profit than you have in reality.
Think of markup coming before margin. While markup is based on cost price (how much you charge for your goods), margin is related to sales price (how much those goods actually sell for).
How to calculate margin vs markup
We’ll take you through the calculations as they apply to each term and give you an example of each.
How to calculate markup
To calculate the markup you will have to consider:
- The cost of goods sold (COGS): the amount of money it takes to create your goods to the point that they are ready for sale.
- Your overhead: the expenses in your business that are not directly linked to the creation of your product.
- The profit you want to make on the item
If you add your overhead to the profit you want to make, you’ll have an idea of how much you want to increase the COGS to ensure that you come away making money from your sales.
How much you “mark up” your COGS to account for profit and overhead must be expressed as a percentage of your cost price and not as a £ value.
With that in mind, the markup formula is as follows:
Markup % = (Sales price - COGS)/COGS x 100
Here’s what that looks like in practice:
Let’s say you decide to sell your famous homemade fudge at a market. To get your COGS, you will consider the costs involved in making your products, including the ingredients for your secret recipe, your packaging, and the labour you put into making, promoting and selling this sweet treat.
Let’s say your COGS for the day is £500 for 125 bags of fudge, or £4 per bag.
Before you can calculate your markup, however, you have to take into account the overhead for your enterprise. You may have to pay for a stall at the market, a board that displays your price list, and a cash box to keep your earnings in. You also have to consider transportation of your goods.
When you add this all together, you come up with the figure of £100 for your overhead.
Once you have an idea of your overhead, your next job is to decide how much profit you want to make. You don’t want to set it so high that it is prohibitively expensive, but you also don’t want to set it so low that you don’t make a profit.
You work out that you would like to make a profit of £200 for the day.
To make that happen, you have to set your sales price in such a way as there is enough left over at the end.
So you add up the COGS (£500), overhead (£100) and desired profit (£200) and get £800 — this is the amount you want to bring in after selling all your products (125 bags of fudge!)
That means your selling price must be £6.40 (£800 / 125) per bag.
Remember that your COGS for one bag was £4.
So let’s go back to our formula:
Markup % = (Sales price - COGS)/COGS x 100
We plug our numbers in and we get:
Markup % = (6.40 - 4)/4 x 100
= 2.40/4 x 100
= 60%
That means your percentage markup is 60%.
How to calculate margin
Margin is the profit you make after you account for your expenses.
Unlike markup, it’s related to how much your goods actually sell for (sales price) rather than how you price them (cost price).
Like markup, it’s reflected as a percentage:
Margin = (Sales price - COGS)/Sales price x 100
Let’s return to your fudge stall.
The sales price you decided on through working out markup is £800 per bag.
The COGS is £500.
You’ve now sold all those bags of fudge as expected. The next step is to work out how much of what you’ve made is profit, or the profit margin.
If you plug your numbers into the formula for calculating margin, you get:
Margin = (£800 - £500)/£800 x 100
= 37.5%
If you were to work out the margin for just one bag of fudge, you’d get the same answer:
Margin = (£6.40 - £4)/£6.40 x 100
= 37.5%
So, the percentage of your final sales price that can be counted as profit is 37.5%. It seems worth your while to keep selling fudge!
Markup vs Margin: FAQs
How do you convert margin to markup?
The easiest way to convert margin to markup is to take apart your formula for margin and then input the relevant numbers into your markup formula.
To work out margin, you need values for:
- Sales price
- COGS
Margin = (Sales price - COGS)/Sales price x 100
Take those same values and reinput them into your markup formula:
Markup = (Sales price - COGS)/COGS x 100
Or, if you like, you can use this handy calculator from OMNI Calculator that will do the work for you.
What is the difference between 30% margin and 30% markup?
30% margin shows that 30% of your final sales value is profit.
30% markup, on the other hand, shows you that you are increasing your cost price by 30% to account for overhead you have to cover and the profit you would like to make.
Quickfire summary
Markup and margin are both vital terms when it comes to making financial decisions for your company and for accounting for them.
Both terms make use of the following values in their formulae:
- Cost of goods sold (COGS): what you pay for the product you sell
- Sales price: what you sell that product for
However, how these values are used differs.
For markup, you are determining what to sell an item for. To do so, you use the following formula:
Markup = (Sales price - COGS)/COGS x 100
The result will give you the percentage of your COGS that you should increase it by to get your selling price.
For margin, you are determining how much of the income you generate from selling your goods is profit. To do so, you use the following formula:
Margin = (Sales price - COGS)/Sales price x 100
The result will give you the percentage of your sales that is profit.
While these two terms are similar, knowing the difference between them is vital to making informed decisions for your business. They help you ensure that you don’t set your prices too high or too low and that you can understand the actual profit you are bringing in.
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