Markup and margin

The same profit, two denominators

Buy something for 100 and sell it for 150 and you have made 50. Divide that 50 by the 100 it cost and you get a 50% markup. Divide the same 50 by the 150 it sold for and you get a 33.3% margin. Neither number is more correct than the other; they answer different questions, and the profit in both is the same fifty.

Markup asks how much you added on top of what you paid. Margin asks what share of the money coming in you actually keep. Because the price is always the larger of the two denominators, the margin is always the smaller percentage — and the gap widens as the figures grow.

Going from a margin to a price is a division

This is where the figure usually goes wrong, and it is the same mistake as taking VAT out of a total by subtracting a percentage. To price a cost of 70 at a 30% margin, divide: 70 ÷ 0.70 = 100. Multiplying by 1.30 gives 91, whose margin is 23%, not 30%.

The reason is that the margin is a share of a number you do not have yet. You cannot take 30% of the price before you know the price, so the sum has to run the other way — the cost is the 70% you do know, and dividing by it produces the whole. It is the same kind of sum as taking VAT back out of a total that already includes it.

Why a margin cannot reach 100%

A 100% margin would mean the entire price is profit, which is only true if the thing cost you nothing. Enter 100 or more and the calculator says so instead of printing a figure: there is no price that turns a real cost into no cost. A markup has no such ceiling, because it is measured against the cost rather than against the price, so 500% is a perfectly ordinary thing to type.

If a supplier or a marketplace quotes you a number above 100, it is a markup, whatever it is being called.

Selling below cost

Enter a price under the cost in the calculator and the profit, the markup and the margin all go negative. That is deliberate. Clearing old stock, buying a first project with a reference, or absorbing a bad estimate are all real decisions, and a calculator that refused to show them would be pretending they do not happen. The figures simply describe what the decision costs.