Definition (canonical)
Margin is profit expressed as a percentage of the selling price; markup is profit expressed as a percentage of cost. Same money, two different denominators — and confusing them is one of the most expensive small-business mistakes, because a "50% markup" is only a 33% margin.
The two formulas side by side
`Margin = (price − cost) ÷ price` · `Markup = (price − cost) ÷ cost`
Buy at 60, sell at 100: profit is 40, margin 40%, markup 66.7%. The conversion runs both ways:
| Markup | Margin |
|---|---|
| 25% | 20% |
| 50% | 33% |
| 100% | 50% |
| 300% | 75% |
Markup answers the pricing question ("what do I add to cost?"); margin answers the business question ("what share of each sale do I keep?"). Financial statements, investors and P&L analysis speak margin.
Gross, operating and net margin
Like profit, margin comes in layers: gross margin covers only direct costs of goods sold; operating margin adds overheads; net margin includes everything down to tax. Each is revenue-relative, which makes companies of different sizes comparable — the whole point of margins over absolute amounts. Benchmarks are strictly industry-bound: grocery retail survives on low single-digit net margins, software lives above 20%.
Pricing with margins, not vibes
Working backwards from target margin: `price = cost ÷ (1 − margin)`. Want 40% margin on a 60 cost? Price = 60 ÷ 0.6 = 100. Common trap: discounting without doing this math — at 30% margin, a 15% discount erases half the profit, and the volume needed to compensate is far larger than intuition suggests. Unit economics extends this thinking to the whole customer relationship.
FAQ
Which should a shop owner track weekly? Gross margin by product line — it spots supplier price creep and mix shifts fastest.
Does margin apply to services too? Fully — cost is then hours times loaded labor rates plus tools. Service firms that never compute per-project margin routinely discover that their biggest client is their least profitable one.
Can margin be negative? Yes: selling below cost. Sometimes deliberate (loss leaders, market entry), but only survivable when other lines subsidize it knowingly.
Is high markup proof of profitability? No — markup ignores overheads. A 200% markup with heavy fixed costs can still mean a net loss.
Why do accountants insist on margin? Because statements are structured as percentages of revenue; margin plugs straight into them, markup does not.
Related: Revenue · Profit · Unit Economics · P&L Statement Reviewed: 2026-07-15 · Sources: managerial accounting canon