Markup vs margin: how to convert one to the other

Markup is your profit on an item divided by what it cost you. Margin is the same profit divided by what you sold it for. Markup = (price - cost) / cost. Margin = (price - cost) / price. Same profit, different bottom line on the fraction, and the gap between the two numbers is where a surprising amount of small-shop money goes missing.

This post is the arithmetic: how to get from one to the other, what the common values convert to, and the mistakes that cost the most. For how to choose a price in the first place, see how to set a shelf price that actually pays.

One product, both numbers

Take a mug that costs you 4.50 and sells for 7.50. The profit on it is 3.00.

• Markup: 3.00 / 4.50 = 66.7 percent.
• Margin: 3.00 / 7.50 = 40 percent.

Both are correct. They answer different questions. Markup tells you how far above cost you priced it. Margin tells you how much of every sale you keep once the goods are paid for.

Markup is always the bigger of the two, because cost is always smaller than price. Anything sold above cost has a margin under 100 percent, however high the markup goes.

Converting between them

You do not need the price or the cost to convert. Work in decimals (40 percent is 0.4) and use these:

margin = markup / (1 + markup)

markup = margin / (1 - margin)

Check them against the mug. A markup of 0.667 gives 0.667 / 1.667 = 0.4, a 40 percent margin. A margin of 0.4 gives 0.4 / 0.6 = 0.667, a 66.7 percent markup.

If you have a cost and want a price, there are two routes that land in the same place. From a markup, multiply: price = cost × (1 + markup). From a target margin, divide: price = cost / (1 - margin). The mug at a 40 percent target margin is 4.50 / 0.6 = 7.50.

The conversion table

Here are the markups you are most likely to meet, with the margin each one actually gives and the price it produces on a cost of 10.00.

Markup	Margin	Price on a cost of 10.00
20%	16.7%	12.00
25%	20.0%	12.50
33.3%	25.0%	13.33
50%	33.3%	15.00
60%	37.5%	16.00
75%	42.9%	17.50
100%	50.0%	20.00
150%	60.0%	25.00
200%	66.7%	30.00

And going the other way, the markup you need to hit a target margin:

Target margin	Markup needed
20%	25.0%
25%	33.3%
30%	42.9%
40%	66.7%
50%	100%

Two rows are worth remembering. Doubling the cost (100 percent markup) is a 50 percent margin. And a 50 percent markup is only a 33.3 percent margin, which is where most of the trouble starts.

The expensive mistake

Someone tells you a trade runs on 30 percent. You add 30 percent to cost and price accordingly. An item costing 10.00 goes out at 13.00, and you believe you keep 30 of every 100 that comes through the till.

You keep 3.00 out of 13.00, which is 23.1 percent. The shortfall is 6.9 percentage points, and that understates it: you are making 23.1 where you planned on 30, so gross profit is 23 percent lower than you thought.

On 20,000 of sales a month, a true 30 percent margin is 6,000 of gross profit. A 30 percent markup gives 4,615. That is 1,385 a month, or about 16,600 a year, that was in the plan and never in the bank. No single sale looks wrong, which is why it can run for years.

To actually get a 30 percent margin on that 10.00 item, the markup has to be 42.9 percent, and the price 14.29.

Discounts eat margin faster than you think

A discount comes off the price, but the cost does not move. So the whole discount comes out of your profit.

Take an item at 10.00 that costs 7.00: a 30 percent margin, 3.00 of profit. Knock 10 percent off and it sells for 9.00. The cost is still 7.00, so the profit is now 2.00. A 10 percent discount has cut the gross profit on that item by a third, and the margin has fallen to 22.2 percent.

To make the same 3.00 back at 2.00 a sale, you need to sell 1.5 units for every one you sold before: 50 percent more volume, just to stand still. At 20 percent off, the profit per unit is 1.00 and you need three times the volume.

The general rule: sales needed = margin / (margin - discount), with both as fractions of the original price. The thinner the margin, the worse it gets. A 10 percent discount on a 15 percent margin line needs three times the sales to break even.

None of this means never discount. Clearing dead stock at a loss is often the right call, because that money is already spent. It means knowing what a promotion costs before you run it.

Which number for what

Use markup to set a price. You know the cost when the stock arrives, and cost times (1 + markup) is the quickest way to a shelf price. Just choose the markup from the margin you want, using the table above, not the other way round.

Use margin to judge the business. Margin is a share of sales, so it lines up with everything else measured against sales: rent, wages, takings. If your rent is 10 percent of turnover, you know immediately what a 25 percent margin leaves. Markups do not add up across a shop in any useful way, because each one is a percentage of a different cost.

That is why gross margin is the first of the five numbers worth checking every week, and why it should be measured on what actually sold, not on what is priced on the shelf. A 200 percent markup on something nobody buys earns nothing.

Cost means landed cost

Every formula here is only as good as the cost you put into it, and that cost is what the item took to reach your shelf, not the figure on the supplier’s invoice. Add delivery spread across the order, duty, handling fees, and an allowance for anything that spoils or breaks.

An understated cost inflates both numbers. If the invoice says 4.50 but delivery adds 0.30, the mug’s real cost is 4.80 and its margin at 7.50 is 36 percent, not 40.

The price side has the same trap. If your shelf price includes VAT, the tax is not yours, so work margin out on the price before VAT.

Where StoreWave sits

StoreWave keeps a moving average of what you have paid for each product, updated every time you receive stock, and each sale line records the cost at the moment it was sold. When a supplier puts prices up, last month’s margins stay as they were rather than shifting to today’s cost.

The profit reports show revenue, cost and margin by period and by product, with discounts and tax already taken out of revenue. Seeing them needs the profit permission, which only the Owner role starts with, so staff do not see your margins unless you choose to grant it.