How the Margin Calculator Works
Every business needs to know how much it earns on each sale. Two numbers describe it: profit margin and markup. They sound alike and both use the same profit, but they compare it to different things, so they give different percentages. Mixing them up is one of the most common pricing mistakes. The Margin Calculator finds both, and it can work backward from either one to a selling price or a cost.
The three basic numbers
- Cost: what it costs you to make or buy one item.
- Selling price: what the customer pays.
- Profit: the selling price minus the cost.
Margin and markup
Profit margin is the profit as a share of the selling price. Markup is the profit as a share of the cost:
profit = selling price - cost margin = profit / selling price x 100 markup = profit / cost x 100
Because the cost is smaller than the selling price, the markup is always a bigger percentage than the margin, as long as you make a profit.
The four ways to use the calculator
| You know | The calculator finds | Formula |
|---|---|---|
| Cost and selling price | Profit, margin and markup | the formulas above |
| Cost and the margin you want | Selling price | price = cost / (1 - margin) |
| Cost and the markup you want | Selling price | price = cost x (1 + markup) |
| Selling price and margin | Cost | cost = price x (1 - margin) |
In these formulas, the margin and markup are written as decimals: 40% is 0.40.
A worked example
An item costs you $60 and you sell it for $100.
| Result | Amount |
|---|---|
| Profit | $100 - $60 = $40 |
| Margin | $40 / $100 = 40% |
| Markup | $40 / $60 = 66.67% |
The same $40 of profit is a 40% margin and a 66.67% markup. Going the other way: to earn a 40% margin on a $60 cost, you must charge $60 / (1 - 0.40) = $100.
The classic mistake
Suppose a product costs $50 and you add a 40% markup. The price is $50 x 1.40 = $70, and the profit is $20. But the margin is only $20 / $70 = 28.57%, not 40%. If you wanted a 40% margin, you would have needed a price of $50 / 0.60 = $83.33, which is a 66.67% markup.
Chart: how the price is split
In the first example, each $100 sale is made up of your cost and your profit:
Cost ████████████████████████ 60% $60 Profit ████████████████ 40% $40
Margin and markup side by side
The same profit expressed both ways. Notice how quickly the markup grows:
| Profit margin | Same as a markup of |
|---|---|
| 10% | 11.11% |
| 20% | 25% |
| 25% | 33.33% |
| 30% | 42.86% |
| 40% | 66.67% |
| 50% | 100% |
| 60% | 150% |
| 70% | 233.33% |
A margin can never reach 100%, because that would mean the item costs nothing. A markup can be any size. A 100% markup means you charge double your cost, which is a 50% margin.
Good to know
- This is a gross margin: it counts only the direct cost of the item. Rent, wages, marketing and other overheads still have to be paid out of the profit.
- If the selling price is below the cost, the margin is negative, and the calculator shows a loss.
- Retailers often talk in markup, and finance teams in margin. Check which one someone means before comparing numbers.
- Discounts reduce your margin fast. A 10% discount on a 40% margin item leaves a margin of about 33%.
This tool gives an estimate for general information only. It is not financial advice.