Margin vs. markup: Key differences & how to calculate

You’ve probably heard finance teams and sales teams use the terms “margin” and “markup” interchangeably. The thing is, they’re not the same, and treating them like they are can lead to significant oversights.

Both margin and markup are essential for understanding profitability, but they measure two very different sides of your business performance.

Margin shows you what percentage of revenue you keep as profit. Markup tells you how much you add to your costs to set a selling price. The confusion happens because both rely on the same components (cost, selling price, and profit), but they frame the math in opposite ways.

Why does this distinction matter? Because using the wrong metric can distort your reporting, throw off pricing strategies, and even shrink your bottom line without you realizing it. A price set with the wrong markup may not deliver the margin you need. A report built on margin instead of markup might mislead sales or investors.

That’s why this guide breaks down what margin and markup are, walks you through the formulas and examples for calculating each, and explains when to use them. You’ll also get a handy conversion chart to keep for quick reference.

What is profit margin?

Profit margin is the percentage of revenue a business keeps as profit after covering its costs.

It shows how efficiently sales translate into earnings, and because it’s expressed as a percentage, it allows for easy comparison across products, time periods, or even industries.

When you hear someone say a company has "healthy margins", they're talking about how much profit the business keeps from each dollar of revenue. A higher margin means the company retains more profit from its sales, while a lower margin indicates that costs are eating up more of the revenue.

There are actually several types of profit margins that measure profitability at different levels:

• Gross profit margin (often just called “gross margin”) looks at profit after cost of goods sold (COGS).

• Operating margin considers income after operating expenses

• Net margin accounts for profit after all expenses, including taxes and interest

How does margin work?

Margin works by showing what portion of revenue actually turns into profit after costs are deducted. It’s calculated as profit ÷ revenue, and the result tells you how much of each sales dollar the business keeps.

For example, if your business makes $100,000 in revenue with $80,000 in costs, your profit is $20,000. Divide that profit by revenue ($20,000 ÷ $100,000), and you get a 20% profit margin. That means you keep 20 cents in profit for every dollar of sales.

This revenue-based view makes margins especially useful for financial reporting and analysis. Investors, lenders, and managers rely on margin metrics to see whether a company is controlling costs effectively and whether sales are generating sustainable returns.

What is markup?

On the other hand, markup is the amount added to the cost of a product or service to determine its selling price, expressed as a percentage of the original cost.

Unlike margin, which is calculated based on revenue, markup starts with your costs and tells you how much extra you're charging on top of those costs.

This cost-first perspective is why many businesses use markup when setting prices, as a straightforward way to ensure profitability while covering costs. For example, if a product costs $50 to produce and you apply a 100% markup, the selling price becomes $100.

How does markup work?

Markup works as a cost-based pricing strategy. The markup percentage represents how much you increase the cost to arrive at a selling price.

This approach makes it easy to maintain consistent profit relationships across different products with varying cost structures.

Here’s another instance: if producing a service costs $1,000 and you apply a 40% markup, the selling price becomes $1,400. If another product costs $75 with the same 40% markup, the selling price becomes $105. In both cases, you maintain the same profit relationship.

This makes markup particularly useful for businesses that want consistent pricing across products with varying costs.

Centralize spend management and eliminate fragmented processes

See Rippling

What's the difference between margin and markup?

If you had to sum it up in one line, margin is profit as a percentage of revenue, while markup is profit as a percentage of cost.

That’s the core difference, but the way each is used creates some important distinctions you need to understand:

Basis of calculation

Margin is calculated from revenue, showing the percentage of sales that becomes profit. Markup is calculated from cost, showing how much extra you add to the cost to set your price. This means the same profit amount will result in different percentages depending on which metric you use.

Common use cases

Finance teams typically use margin for financial reporting, performance analysis, and investor communications because it shows what percentage of sales becomes profit. Sales and pricing teams often prefer markup because it's easier to use when setting prices and ensures consistent profit levels across different products.

Pricing strategy impacts

Markup drives price-setting because it starts with costs and builds up to a selling price. Margin comes in after the fact, showing how profitable those pricing decisions actually turned out to be. Both perspectives matter, but in this case, we have one for action, the other for evaluation.

Effect on profitability

Higher markups don't always translate to higher margins, especially as markups increase. A 100% markup results in a 50% margin, but a 200% markup only achieves a 67% margin. This relationship means businesses focused solely on markup might not optimize their actual profitability.

Miscommunication risks

Mistakes happen when teams use markup and margin interchangeably. Setting a "50% margin" when you actually mean "50% markup" results in much lower profitability than intended. These miscommunications can lead to underpricing, reduced profits, and strategic planning errors.

Ease of calculation

Markup calculations are generally more straightforward for pricing purposes because you start with known costs and add a percentage to determine the selling price. Margin calculations require knowing both cost and selling price, making them better for analysis than for initial pricing decisions.

Financial reporting implications

Financial statements and investor reports typically express profitability in terms of margins because they provide clearer insights into operational efficiency and competitive positioning. Markup percentages are less meaningful to external stakeholders who want to understand overall business performance.

Here's a quick comparison of the key differences:

How to calculate profit margin: Step-by-step guide

Profit margin formula

The basic profit margin formula is: Profit Margin = (Revenue - Cost) / Revenue x 100This formula gives you a decimal that you can convert to a percentage by multiplying by 100. The result tells you what percentage of your revenue remains as profit after covering costs.

Step-by-step profit margin calculation example

Let’s walk through a practical example to show how to calculate margin in a real business situation.

Step 1: Determine your revenue

Start by identifying the total selling price or revenue for the product or service you're analyzing. For this example, let's say you sold a product for $150.

Step 2: Subtract your costs

Calculate your total costs, including cost of goods sold and any other direct expenses associated with the sale. In our example, let's say the total cost was $90.

Step 3: Divide profit by revenue

Take your profit ($150 - $90 = $60) and divide it by your revenue ($150). This gives you: $60 ÷ $150 = 0.40

Step 4: Convert to a percentage

Multiply the result by 100 to get your profit margin percentage: 0.40 × 100 = 40%This means you kept 40% of your revenue as profit, with the remaining 60% going to cover costs.

How to calculate markup: Step-by-step guide

Markup formula

The markup formula is: Markup = (Revenue - Cost) / Cost x 100This formula shows you how much you're adding to your original cost, expressed as a percentage of that cost.

Step-by-step markup calculation example

Using the same numbers from our margin example, let's calculate the markup percentage.

Step 1: Determine your cost

Identify the total cost of your product or service. In our example, this is $90.

Step 2: Set your selling price

Determine what you're charging customers. For our example, this is $150.

Step 3: Subtract the cost from the selling price

Calculate your profit by subtracting cost from selling price: $150 - $90 = $60

Step 4: Divide the markup by the cost and convert to a percentage

Take your profit ($60) and divide it by your cost ($90): $60 ÷ $90 = 0.667Convert to percentage: 0.667 × 100 = 66.7%This means you're marking up your cost by 66.7% to arrive at your selling price.

Margin and markup conversion chart

Since margin and markup represent the same profit relationship from different perspectives, you can convert between them using this reference chart:

Notice how markup percentages are always higher than the corresponding margin percentages. This is because markup uses the smaller cost figure as its base, while margin uses the larger revenue figure.

Automate payroll and expenses across every global location

See Rippling

When should you use margin or markup?

Choosing between margin and markup depends on your specific business context and what you're trying to accomplish. Using the wrong metric in the wrong situation can lead to pricing mistakes or financial misreporting.

Use cases for margin

Margin is most valuable when you need to understand or communicate overall business performance and profitability. It comes in handy when:

• You're preparing financial statements or reports where stakeholders need to understand what percentage of sales becomes profit. Margin provides the clearest picture of operational efficiency and competitive positioning.

• You need to evaluate company-wide profitability or compare performance across different time periods. Margin percentages make it easy to track whether your business is becoming more or less profitable over time.

• You're comparing product lines or departments on financial performance. Margin analysis helps identify which areas of your business are most profitable and where you might need to focus improvement efforts.

• You're setting performance goals based on profit targets. Margin-based goals align with how investors and lenders evaluate business performance.

Use cases for markup

Markup is most useful for operational pricing decisions and ensuring consistent profitability across your product line. This approach makes the most sense when:

• You're setting prices for products or services and need to ensure adequate profit margins while remaining competitive. Markup calculations make it easy to determine selling prices that cover costs and achieve profit targets.

• You need to create sales quotes or proposals quickly and accurately. Starting with known costs and applying standard markup percentages streamlines the pricing process.

• You're trying to ensure consistent profit levels across products with different cost structures. Markup percentages help maintain profitability relationships regardless of individual product costs.

• You want to calculate a selling price from cost quickly without complex calculations. Markup provides a straightforward multiplier approach to pricing.

Simplify financial management with Rippling

Managing margins, markups, and overall financial performance becomes much easier when you have integrated systems that automatically track and categorize your spending. Rippling's spend management platform provides complete visibility and automated policy controls across every type of business expense.

With Rippling, you can centralize all your spend management in one place, from payroll and corporate cards to bill payments and expense management. This unified approach gives you real-time visibility into where your money is going and how it impacts your overall profitability calculations.

The platform's automated policy controls help maintain transparent pricing and profitability tracking by ensuring expenses are properly categorized and approved according to your business rules. Custom policies based on employee data create efficient approval workflows that reduce overspending while maintaining operational flexibility.

For businesses managing global operations, Rippling automates payroll, expenses, and international payments while maintaining compliance with local tax and labor laws. This comprehensive approach reduces the administrative overhead that can eat into your margins while ensuring accurate financial reporting across all locations.

The integrated nature of Rippling's platform means your financial data flows seamlessly between HR, IT, and finance functions, eliminating data silos. When all your business data lives in one system, financial analysis becomes more accurate and strategic decisions become easier to make.

Margin vs markup FAQs

Is 50% margin 100% markup?

Yes, a 50% margin is equivalent to a 100% markup. When you double your cost (100% markup), you end up with a selling price that makes your profit equal to 50% of revenue. For example, if something costs $50 and you mark it up 100% to sell for $100, your $50 profit represents 50% of the $100 selling price.

What is a 30% margin?

A 30% margin means that 30% of your revenue remains as profit after covering all costs. If you sell something for $100 with a 30% margin, you keep $30 as profit, and $70 goes to cover costs. This translates to approximately a 42.9% markup on the original cost.

What margin is a 1.25 markup?

A 1.25 markup multiplier means the selling price is 1.25 × cost.

• Example: If your cost is $100, the selling price is $125.

• Profit = $25, and margin = $25 ÷ $125 = 20%.

So, a 1.25 markup multiplier equals a 20% margin.

How do you convert markup to margin?

To convert markup to margin, use this formula: Margin = Markup ÷ (1 + Markup). For example, a 50% markup (0.50) converts to: 0.50 ÷ (1 + 0.50) = 0.50 ÷ 1.50 = 0.333 or 33.3% margin.

What is a good margin for a small business?

Good margins vary significantly by industry, but most healthy small businesses aim for gross margins between 20% and 50%. Service businesses often achieve higher margins (40-60%) because they have lower cost of goods sold, while retail businesses might operate successfully on 20-30% margins due to higher volume and inventory costs. The key is understanding your industry benchmarks and ensuring your margins cover all operating expenses while providing reasonable profit.