Profit margin vs markup: formulas and pricing examples
Both describe the difference between price and cost. They answer different questions, and confusing them can leave a product underpriced.
Open the Profit Margin Calculator →Why the difference changes your selling price
Suppose an item costs £12 and you want a 40% margin. Adding 40% to the cost gives a price of £16.80. The £4.80 left over is only 28.57% of that selling price. A 40% margin requires £20: the £8 left over is 40% of the money received. The percentages describe different parts of the same sale.
This matters when you agree a target with a stockist or compare products in a spreadsheet. Write down whether the target is margin on revenue or markup on cost. A number labelled simply ‘profit percentage’ can leave two people working towards different prices.
| Cost | Price | Amount remaining | Margin | Markup |
|---|---|---|---|---|
| £12 | £16.80 | £4.80 | 28.57% | 40% |
| £12 | £20 | £8 | 40% | 66.67% |
Choose the costs before choosing the percentage
A materials-only margin can look generous while the order barely pays for your time. Include labour, packaging, postage you absorb and applicable selling fees if you want an order contribution figure. Keep the same cost basis when comparing products; otherwise the percentage tells you more about what was omitted than which product performs better.
For example, a £20 sale with £8 of materials appears to leave £12. Add £4 making time, £1 packaging and £3 delivery, and the amount remaining falls to £4 before any marketplace fee. Record those cost lines separately so a later price review can identify what changed.
Use a margin target to work backwards
For a fixed included cost, divide cost by one minus the target margin as a decimal. £12 divided by 0.60 gives £20 for a 40% target. This shortcut assumes the cost stays fixed. Percentage marketplace charges rise with price, so use the product pricing tool with those charges entered when they apply.
Round the proposed price to the price you intend to list, then calculate its actual margin again. A neat retail price may meet your target, or fall a little short. The final check is especially useful for low-priced items where a few pence matter.
A worked example
With £12 cost and £20 price, £8 remains. Margin is 8 ÷ 20 = 40%; markup is 8 ÷ 12 = 66.67%.
Before you use the result
- Name the metric: margin on revenue or markup on cost.
- Use the same included costs for every product you compare.
- Keep collected tax out of business revenue where applicable.
- Recalculate after rounding the final selling price.
Common questions
Is a 50% markup the same as a 50% margin?
A 50% markup turns £10 cost into £15 price, leaving £5. That is a 33.33% margin. A 50% margin on the same £10 cost requires £20 price. Neither figure accounts for costs you have left out.
Which percentage should I use?
Use the measure that matches the decision. Margin is useful for comparing what remains from sales revenue; markup is useful when building a price from cost. State the cost basis and use the chosen measure consistently.
Put the numbers into practice
Profit Margin Calculator →Contribution margin vs net profit for online sellers →How to include labour in handmade product pricing →How to compare a product price increase or reduction →A practical calculation guide, not professional accounting, legal or tax advice. Examples are illustrative unless identified as official. Calculation methodology and limitations.