The same profit, two ratios, two answers
An item costs you $8 and you sell it for $10. You made $2. Divide that $2 by the price and you get 20 percent, which is the margin. Divide it by the cost and you get 25 percent, which is the markup. Neither number is wrong. They answer different questions, and the trouble starts when a supplier quotes markup, a spreadsheet reports margin, and somebody in the middle treats them as the same word.
The rule of thumb worth memorising is that markup is always the bigger number. If someone tells you they run a 50 percent markup, they are keeping 33.3 cents of every dollar. If they tell you they run a 50 percent margin, they are doubling cost. That is a large gap to discover at the end of a quarter.
| Markup on cost | Margin on price | $10 cost sells for |
|---|---|---|
| 25% | 20% | $12.50 |
| 33.3% | 25% | $13.33 |
| 50% | 33.3% | $15.00 |
| 66.7% | 40% | $16.67 |
| 100% | 50% | $20.00 |
| 150% | 60% | $25.00 |
To convert: margin = markup ÷ (1 + markup), and markup = margin ÷ (1 − margin).
Working backwards to a price
This is where the two ratios cause real money to go missing. To hit a 40 percent margin on a $60 cost, the price is $60 ÷ 0.60, which is $100. It is not $60 × 1.40. That gives $84, which is a 40 percent markup and only a 28.6 percent margin. The gap on one unit is $16 and it scales with everything you sell.
The general form is price = cost ÷ (1 − margin). When a percentage fee comes off the top as well, the fee has to sit inside the same division, because the fee scales with the price you are still solving for: price = (cost + shipping) ÷ (1 − margin − fee rate). Leave the price field blank on this page and that is the arithmetic being run.
What to put in the cost box
Landed cost, not the invoice line. That means the purchase price plus inbound freight, duty, and anything you pay to get the item onto your shelf in sellable condition. If a case of twelve costs $84 delivered, the unit cost is $7, not $6.50 plus a freight bill you deal with separately.
What does not belong here is rent, wages, insurance or software. Those are fixed costs. They do not change when you sell one more unit, so putting them in a per-unit margin calculation misstates both ratios. The place they belong is the break-even calculator, where the margin from this page tells you how many units it takes to cover them.
Where the number stops being useful
A margin is a description of a transaction that already has a price attached. It does not tell you what to charge. Price is set by what the item is worth to the person buying it, what else they can buy instead, and how much of your attention the category deserves — none of which appear in this arithmetic. A calculator that told you the correct price would have to know your market, and it does not.
It is also worth checking a margin against volume before acting on it. A 60 percent margin on something that sells twice a month is worth less than 15 percent on something that moves every day, and the instinct to prune the low-margin lines has closed a lot of businesses that were funding their overhead on turnover.
Questions people ask
Which one should I actually use to run the business?
Margin, for almost everything downstream. Break-even, advertising limits, how much discount you can absorb and how a price change plays out are all computed against the selling price, so they need margin. Markup is a pricing shortcut — it is the number you apply to a cost to arrive at a shelf price, and it is what supplier and distributor price lists usually quote. Use markup to set the price, then convert to margin before you make any decision about whether the business works.
Why does the calculator take the selling fee off before the margin?
Because the money never reaches you. A marketplace commission or card processing fee comes off the payment before it settles, so a $10 sale with a 10 percent fee is $9 of revenue, not $10 of revenue and a $1 expense somewhere else. Treating it as a cost of the sale keeps the margin honest, and it means the target-margin calculation solves for a price that still clears your target after the platform has taken its share. If you sell the same item through several channels, run each channel separately — the margins usually differ by more than people expect.
Does a 30 percent discount cut a 40 percent margin to 10 percent?
No, it is worse than that. Cutting the price by 30 percent leaves you 70 cents of revenue against the same 60 cents of cost, so you keep 10 cents on 70 cents of sales, which is a 14.3 percent margin. The profit per unit drops from 40 cents to 10 cents, so you need four times the volume to make the same money. Put the discounted price into the price field before you commit to a promotion and look at what comes back.
How do I handle sales tax?
Keep it out of both boxes. Tax you collect is money you are holding for a state, not revenue, and tax you pay on inputs is either recoverable or part of the landed cost depending on where you are and what you are buying. Use pre-tax figures on both sides and the two ratios come out comparable. If your accounting is on tax-inclusive prices, divide both cost and price by the same factor first — the margin is unchanged, but only if you treat both sides the same way.