Markup vs. Margin
Markup measures profit relative to cost; gross margin measures gross profit relative to selling price. They are not interchangeable percentages.
Definition
Markup measures profit relative to cost; gross margin measures gross profit relative to selling price. They are not interchangeable percentages.
Practical example
If cost is $80 and price is $100, gross profit is $20. Markup is $20 ÷ $80 = 25%. Gross margin is $20 ÷ $100 = 20%.
How it works
Price = cost × (1 + markup). Margin = (price − cost) ÷ price. To price for a target margin, price = cost ÷ (1 − target margin), before other relevant considerations.
Why it matters
Confusing the two can cause systematic underpricing. A 25% markup does not create a 25% margin.
Common misunderstanding
Neither figure alone proves overall profitability because overhead, labor classification, waste, discounts, and taxes may sit outside the selected cost.
Limitations
The example is simplified. Businesses should define cost consistently and obtain accounting advice for their circumstances.
Useful questions
- What is included in cost?
- Is the target a markup or a margin?
- Does the price cover overhead and expected waste?
- How do discounts change the realized margin?
Related reading
Sources and review notes
Sources were accessed 2026-09-16.
- Manage your finances — U.S. Small Business Administration
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