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Margin vs. Markup: Which Formula is Best For Your Business?

by Thomas | Last Updated: March 2nd, 2022 | Accounting | 64 comments

How do you calculate margin vs. markup — and what’s the difference between the two?

It starts with deciding on how to price your products (which is a big deal). How you price your goods will depend on a few things. Whether you buy your products in bulk, or if you buy them from different vendors at different prices. However, once you have a system in place to figure out the cost (a.k.a. cost of goods sold or your purchase price), you can use your cost to calculate your price.

This is where the concept of markup comes in. Depending on where you search, you can get different answers for what markup is, and what it has to do with something called margin (or gross profit margin). 

Let’s start with a quick overview:

  • Markup is the amount by which the cost of a product is increased in order to obtain the selling price. For example a markup of $90 on a product that costs $110 would give a selling price of $200. Which is an 82% markup (markup divided by product cost)
  • Margin is the selling price of a product minus cost of goods. Using the above example, the margin for a product sold for $200 with a cost of $110 would be $90. Which is a 45% margin (margin divided by selling price).

If you’re wondering how to untangle that web of M-words then you’ve come to the right place.

Let’s get into it!

Calculate margin vs. markup in video

If you’re one of the millions of people who takes to YouTube for quick tutorials, our Margin vs. Markup video has you covered!

How to Calculate Markup vs. Margin | inFlow Inventory

If you’d like a step by step breakdown of the formulas, read on!

What is the markup formula?

You can think of markup as the extra percentage that you charge your customers (on top of your cost).

The markup formula looks like this:

The formula for markup is (Price - cost) / Cost

An example of using the markup formula

Now let’s make the example a little more concrete. Let’s say the cost for one of Archon Optical’s products, Zealot sunglasses, is set at $18. That $18 is how much it costs Archon Optical to create a single pair of the Zealot. They will then turn around and sell each Zealot for the price of $36.

If we run through that calculation, we arrive at a markup of 100%:

Markup formula calculation: Price of 36- Cost of 18 / Cost of 18 = 1.00, or 100% markup

Pricing products based on markup

However, some businesses might set their prices based on a certain pre-defined markup percentage. They’d have the costs ready and have particular markup percentages in mind to help them calculate a price.

How would we express the markup formula in this case? Let’s write this out:

Cost plus open parentheses cost times markup close parentheses equals price

Given a markup of 100% on the Zealot, the price would be $36.00:

18 plus open parentheses 18 times 1.0 close parentheses equals price of 36

Expressing markup as a percentage can be very useful. This way you can guarantee that you are generating a proportional amount of revenue for each item you sell. Even if down the road your cost changes or increases. This means that the markups you set up at the beginning should scale well as your business grows. We’ll discuss this more when you’ve scrolled further down this page.

What about margin vs. markup?

Now that we’ve defined markup and how it helps you decide on a price, we should discuss the other big M-Word: margin. The type of margin we’re discussing in this case is gross profit margin, which describes the profit that you earn on a product as a percentage of the selling price.

What is the margin formula?

Margin is often written as a specific amount in currency or a as a percentage. However, when calculating margin, you always divide by price.

If we want to calculate margin for the Zealot sunglasses, here is what that looks like:

The margin formula is (Price - cost) / Price

The gross profit margin on Zealot sunglasses is $18 ($36 price – $18 cost), or you could say the margin is 50%.

Expressed in this way, you can see that margin and markup are two different perspectives on the relationship between price and cost. Just like you could say a glass is half full or half empty, the difference is all about perspective. 

When should I use margin? When should I use markup?

The question then arises: if these two M words are so similar, how do we know which one to express or use at a given time? Here’s our take on that:

Markup is perfect for helping ensure that revenue is being generated on each sale. Markup is good for getting started because, as you are getting things set up, you are keenly aware of the costs for your business, and you’re still learning about the kind of revenue you can bring in through sales. 

As you get to know your business better and you start to look at reports on your sales, margin can be helpful for examining how much actual profit you’re making on each sale.

For more of an explanation, check out this Margin vs. Markup video below:

Margin versus Markup

Fixed markup as percentage or dollar amount

The cost of manufacturing the Zealot may not always stay at $18 (actually, it definitely won’t). So the wise staff at Archon Optical will want to make sure that their prices are always adjusted to reflect the increases in cost.

This where the concept of fixed markup really comes in handy, because it can help you to automatically adjust your prices based on changed in cost. You could have cost and price as separate numbers that you input into your spreadsheet or inventory management software, but it’s much easier in the long run to have them linked.

Defining your markup as a percentage above cost ensures that you continue to earn revenue on sales as costs increase, but it also means that you don’t have to keep automatically going back to adjust your pricing. Manually adjusting your prices based on cost is plausible for a smaller business, but this quickly becomes untenable as your inventory expands to include hundreds of items.

If the Zealot becomes more expensive to produce over time, the price will have to go up, and gaining a markup of $18 on a $36 item is very different a markup of $18 on an item priced at $55. A fixed markup percentage would ensure that the earnings are always proportional to the price. 

What other factors affect markup?

We’ve described markup very simply so far because we’re assuming a scenario where Archon Optical makes the Zealot for a set cost and sells it at a set price, and that’s all there is to it. Of course, real life is a little more complicated than that.

For each order of the Zealot, someone will have to be there to package and sell it. That’s a labor cost that’s calculated as an hourly wage. 

If you ship Zealot to customers in boxes or send them in trucks to stores around the city, you need to factor the cost of freight charges. Depending on the shipping carrier you use,  the speed of shipping, and whether you add insurance can make those costs vary wildly. 

Since the Zealot is a product that Archon Optical had to develop over time (it didn’t just materialize as a completed product), they need to account for all of the time that went into making the Zealot aesthetically pleasing while still blocking as many of the sun’s harsh rays as possible. So product development time can also factor into cost.

Automate your pricing with fixed markup and inFlow

Screenshot of inFlow's product pricing - inFlow helps you price products based on markup or existing prices

If your costs change often then you probably spend a lot of time doing price adjustments. Our inventory software can help you change prices—and your markup—with just a few clicks. 

You can set fixed prices for your products, but a fixed markup will always keep your price a consistent percentage above your cost. If you have to update prices on multiple products each week, then this simple feature could save you hours. And you’ll rest easier knowing that your business is making money on each sale, even as your costs change.

But that’s not all—inFlow can also help you with so many other crucial tasks like setting reorder points, integrating your shipping, setting up a barcode system, and more!

Try inFlow Cloud free

No credit card required. Sign up now!

Thomas

Thomas

Thomas is a 100% human being who divides his time between writing medium-sized articles with his keyboard and taking large photographs with his camera.

64 Comments

  1. deborah

    You actually spell out the difference. Can you please do that?

    Reply
    • Matthew Kostanecki

      Hi Deborah

      Not sure I understand what you’re asking! But, feel free to get in touch with support@inflowinventory.com and we’ll do our best to help you out 🙂

      Reply
  2. hellen

    kindly help me convert mark- up into margin.
    Thanks

    Reply
  3. pyno

    whats the mathematical relationship between mark up and margin

    Reply
    • Thomas Wong

      Hi Pyno (and Hellen who asked this before):
      I wouldn’t necessarily try converting one thing into the other. Instead, I’d find out the Price and Cost of a particular item, and calculate margin and markup from there. As long as you have those two variables, you can use the formulas in this post to find out either Margin or Markup.

      Reply
  4. Steve

    Thanks for your interesting article. If I have a range of products that I wish to receive a particular margin on (and it varies). Is there a formula for calculating the markup % to ga in a given margin.

    Ie 50% margin is 100% markup and 40% margin is 80% markup but 20% margin is 25% markup.

    What would 42% margin be for instance?

    Reply
  5. Bisset

    This very useful. Well explained, so simple to understand.

    Thank you !

    Reply
  6. Kiara

    Thomas, this is the best article I’ve read on the topic. You have a knack for teaching! Please keep doing what you’re doing.

    Reply
    • Thomas Wong

      Thanks for the kind words and for stopping by, Kiara. I’m glad you found the article helpful!

      Reply
  7. norgah

    Well explained….simple and straight forward.

    Reply
  8. Robyn

    Why would a business not be able to achieve a mark up of 100%

    Reply
    • Thomas Wong

      Hi Robyn!
      Well if you’re reselling there are definitely some high value items, like laptops and cellphones, where it’s hard to make a markup of 100% because you’re already getting the products at a manufacturer markup, and consumers won’t buy the product for much more than that. In these cases, you can usually sell peripherals with a high markup value to help to make up for the loss in profits on the big ticket items.

      Reply
  9. zaheer

    Considering the below what would be my selling price.

    my expenses are 15% of the current sales and my customer receive a discount on every invoice about 20% (which varies customer by customer). I would like to have a net 15% margin of profits.

    should I work my prices based on the above markup formula and how or should I work in the margin formula and how.

    for e.g my cost for a product A is 7. what would be my selling price to get 15% net margin with the above details.

    Reply
    • Thomas Wong

      Hi Zaheer,

      If you’re looking to find out the price and you know the margin and cost, you can use this formula instead:

      Price = -Cost / (Margin-1)
      In your example, that would be:
      Price = -7 / (0.15-1), which is a price of 8.23.

      Reply
  10. Adam

    For margin this formula seems to only apply when the margin is less than 100%. What if you have a product you want to sell for more than 100% margin? And what if you want to maintain the margin over time.

    For example I have an apple that I buy for $0.68. Today, I sell it for $2.00. If the cost goes up to $1.10 tomorrow and I want to maintain the same margin (not markup) how do I do that?

    Reply
    • Thomas Wong

      Hi Adam! I had a colleague on the QA team help with this so that it’s easier to follow the math.
      That same formula in the post can apply to the example you’d written out.

      Let’s just rearrange the margin formula so it’s (Price – Cost) / Price = Margin.
      Using your cost of $0.68 and price of $2.00, that’s a 0.66 margin (66%).

      Knowing that, you can rearrange that formula above to solve for X (the new price).
      (x – 1.10) / x = 0.66
      (x – 1.10) = 0.66x
      x – 0.66x = 1.10
      0.34x = 1.10
      x = 3.24

      So $3.24 your new price to preserve a 66% margin on $1.10 cost.

      Reply
  11. Bongie

    Been confused for years with the margin markup. This is the best explanation ever. I will never forget it again!

    Reply
  12. Sharon Storey

    Hi,

    How do you calculate the mark-up percentage backwards from the GP percentage?
    Is there a way to do that?

    Reply
  13. Jef

    Can I system auto add product picture at side of item in invoice, or estimate

    Reply
    • Thomas Wong

      Hi Jef, sorry, inFlow doesn’t currently add pictures to printed documents/orders.
      However I’ve just recorded your feedback with our team and we’ll let you know if we change this in the future!

      Reply
  14. Larry Souza

    Thank you

    Reply
    • Thomas Wong

      Cheers, Larry!

      Reply
  15. Dave Jones

    How do I add 15% margin onto a €10 item

    Reply
  16. ClifftonKim

    Hi. Is there a formula were you can get a higher percentage of accuracy in your gross profit if you have different mark up? Ex. You have a hundred different types of products and a mark up from 10%-100% in them. How can you get the proper gross profit without a POS system.

    Reply
    • Thomas Wong

      Hi ClifftonKim, we don’t have a formula for this specifically, but rather this is the kind of thing an inventory management system like inFlow Cloud can help with. Because our software can track the profit and COGS on every single sale, it’s easy to run a report on exactly how much gross profit you made over a given period of time, and which products contributed to it the most.

      Here’s a quick example of the types of reports you can run: https://www.inflowinventory.com/support/cloud/reports-included-inflow-cloud/

      We’ve also got a dashboard that shows your Top 5 products, so you can view them without ever having to run a specific report.

      Reply
  17. muhammedfaisal

    i want markup details plz help 1 % markup= ?
    2% markup =?
    plz helf

    Reply
    • Thomas Wong

      Hi Muhammed, sorry, I think there might be a misunderstanding here.
      You’ll usually need two out of three numbers, and then you can use them to figure out the third number.
      So if you have price and cost, you can figure out the markup.
      Or if you have the markup and cost, you can figure out the price.

      Reply
  18. Augusta Akuamoah

    if is 37% based on selling price what does it mean

    Reply
    • Thomas Wong

      Sorry Augusta, I’m not sure what that percentage is referring to. If it’s a % based on the selling price, it sounds like you’re talking about a margin percentage (Margin = (Price-cost)/Price)

      Reply
  19. Sam

    What does this mean “if the gross margin of a product was 30%, it could be increased as much as 17% through simply raising the price 5% if the cost is not changed” ? Can you please explain

    Reply
  20. Ghamdan

    Thanks a lot to clarifying!
    It was really simple and of a great help to my experience.
    For the first time in my career life I got the core meaning of a markup and know the difference between it and the margin.

    Reply
  21. Darren

    If the cost of an item is $14.97 and I sell it for $35.38, the profit is $20.41.

    I have other items with different costs but I want to maintain the same percentage margin as the first item.

    The costs of the other items are;

    $16.64
    $19.92
    $22.94

    It could be that I’m getting confused between percentage margin and percentage markup.

    Thanks,

    Reply
    • Thomas Wong

      Hi Darren!

      It sounds like you want to keep the *markup* fixed across those items, since the numbers you provided represent the cost.
      One easy way to think about it is markup is based on cost, while margin is based on price.

      For the example above, if you use the markup formula with a price of $35.38 and a cost of $14.97, you’ll get a markup of 136.34%.
      So that means you’re setting the price 136.34% above the cost.

      If you’d like to maintain that for the other products, you’d just be adding 136.34% on top of each of their costs.
      So $16.64 (16.64 * 1.3634) = $39.33
      You can then apply the same math to the other costs you mentioned.

      If you really did mean margin, then you can simply convert the markup into margin, and use the margin formula instead. We’ve got another post on how to convert one to the other here: https://www.inflowinventory.com/blog/markup-into-margin-formula/

      Hope that helps!

      Reply
  22. Diana

    Hi I’m been so confused with the margin… let’s see if I have a room with a TL $238 and the cost of $74 how I can get a margin

    Reply
  23. Kevin

    By definition, the markup percentage calculation is cost X markup percentage. Then add that to the original unit cost to arrive at the sales price. The markup equation or markup formula is given below in several different formats.

    Reply
  24. BENEDICTA MUKORI

    im business student but ive been usually confusing btwn margin and markup thanks a lot

    Reply
  25. Muhammad Waseem

    Great experience
    I understand every thing

    Reply
  26. Lisa V

    Hello Thomas –

    How would one calculate the cost of a partner program if the program gives guaranteed margin based upon type of sale – New bus, renewal, upsell/cross-sell? I only have total contract value, so what the value of the PO was, which is reflective of the discount we gave to the partner when we sold it. I have no idea what the discount was and I’ve been wracking my brain trying to figure out how to model the program. Any help would be appreciated.

    Reply
  27. IFEOLUWA

    Very clear and explanatory
    Thanks.

    Reply
  28. issayas

    if you have more notes about mark up and margin effect on financial reported

    Reply
    • Thomas

      Sorry issayas, this post is just about the calculations for now. But we’ll consider that for the future.

      Reply
  29. Andrea Lewis

    This was very helpful! Thank you!

    Reply
  30. Anne Dickson

    Hi, we have a distributor who says he needs to make 30 points on selling our product and that his retailers also will want 30 points
    Our selling price to the distributor is $6k, therefore is he saying he expects $1,800
    What I do not understand is who is on the hook for the retailers margin and how it is calculated

    Reply
    • Thomas

      Hi Anne, that’s a good question, but unfortunately it’s not one that I have a good answer to right now.
      I don’t want to mislead you with my own lack of experience with retailer vs. distributor relations here.

      For something like this, you might have some better luck on our Facebook Community or Quora because you can get really specific about questions and get answers from other business owners who have had similar experiences.

      Reply
  31. Robert

    Hello Thomas,

    I came across this article and have a few questions. You mentioned labor costs and shipping costs in the article. How would you go about factoring these costs into the final pricing of a product being distributed and not manufactured.

    Reply
    • Thomas

      Hi Robert,

      Our software, inFlow Cloud, actually allows you to bake freight and service costs into your product cost. So the amount you paid for shipping and any extra services from the vendor on that purchase order (PO) can be applied to the cost of the products you purchased on a PO.

      We’ve got an article here that breaks down how our software does that math on a simple PO with three products: https://www.inflowinventory.com/support/cloud/inflow-cloud-calculate-cost-item-cost-goods-sold/

      Reply
  32. nao

    how to you calculate a cost price and selling price if you know the gross margin

    Reply
    • Thomas

      Hi Nao, you’d need to know at least two numbers in order to calculate the third number.
      So in order to calculate the cost, you’d need the price and the margin. Or the margin and the cost in order to calculate the price.

      Reply
  33. Mr Cheah

    Discuss the circumstances that require a conversion of “mark-up” to “margin” or vice
    versa

    Reply
  34. Ayesam

    Amazing information. I have a quick question though. Are markup and margin are the same? I understand that markup is the percentage of the profit you’ll make and the margin is how much you need to top up on top of your cost to get a profitable selling price (correct me if I’m wrong) But in a lot of cases when we convert margin to the markup or vice versa they just seem to be the same. Let us say you get a question in a quiz “which I did” saying is margin and markup are the same? In some cases, it is a yes and in other cases, it is a no, but I do want a specific answer as to why people confuse them on being the same or different. Thanks!

    Reply
    • Thomas

      Hi Ayesam,

      They both use the same sets of numbers, but markup is based on cost, and margin is based on price.
      So I think it’s mainly about framing that perspective.

      Reply
  35. Roque

    Amazing explanation thank you so much!!!!

    Reply
  36. Nica

    Are there any unusual circumstances that the rate of markup is equal to the gross profit margin?
    Thanks!

    Reply
  37. Gary Lineker

    You have “Pricing products based on markup” but not “Pricing products based on margin”, would be good addition for consistency

    Reply
  38. Michelle

    Can inFlow interface with Quickbooks?

    Reply
  39. Elly

    Hi guys can someone help me solve this problem urgently.

    Below are the costs to source and sell a laptop cooling pad on Amazon.

    1. Purchase cost – 7.49€
    2. Ocean freight – 1.03€
    3. Amazon commission – 15% of selling price
    4. Order fulfilment fees – 3.99€
    5. Storage fees – 0.15€
    6. Average PPC (advertising) spend – 8% of selling price
    7. VAT – 20%. The selling price should be inclusive of VAT. For example if the VAT inclusive price of a product is 120€, the customer pays 120€ which includes the 20% VAT 20€. Net proceeds for the seller will be 100€.

    Calculate
    1. the ideal price to meet target margins of 18-22% and,
    2. the breakeven price

    Reply
  40. Mittie Montgomery

    Which formula is best to use when trying to calculate the cost of goods sold ( Part 3, Schedule C) of the 1040 tax form?

    Reply
    • Jared Plumb

      Hey Mittie,

      Thanks for reading. I’m not sure either of these formulas would be ideal for calculating cost of goods sold (COGS). You can calculate COGS by first figuring out the cost of your inventory at the beginning of the year. Then add up all the costs you incurred throughout the year like storage fees, administration, purchases, shipping, etc. Now take those two numbers, add them up and subtract your end of the year inventory costs and you’ll have your COGS. Here is an example to help illustrate:

      I spent $20,000 on inventory at the beginning of the year. My storage fees were $500, administrative fees were $250, and I spent $250 on shipping and handling. At the end of the year I still have $10,000 worth of inventory on hand. For this example the COGS would be 20,000 + 500 + 250 + 250 – 10,000 = 11,000.

      Hope this helps. We have a COGS article releasing in the coming months that will go into everything in more detail, so be sure to come back and check it out!

      Cheers,
      Jared

      Reply
  41. Francky Lesperance

    Thank you for sharing such a great article. It really is helpful and I enjoyed it. Thank you again!

    Reply
    • Jared Plumb

      Hey Francky,

      I’m glad you enjoyed the article and got some value from it. That’s what we aim for here at inFlow!

      Cheers,
      Jared

      Reply

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