Margin and markup are both ways to describe the relationship between cost and selling price. They use different denominators, though, so swapping the two can distort pricing decisions.
Define the two formulas
Gross profit per unit is selling price minus unit cost. Margin expresses that profit as a percentage of the selling price: (price − cost) ÷ price × 100. Markup expresses profit as a percentage of cost: (price − cost) ÷ cost × 100.
A simple example
A product costs $60 and sells for $100. Gross profit is $40. Margin = $40 ÷ $100 = 40%. Markup = $40 ÷ $60 = 66.67%. These are both correct statements about the exact same product.
$60 cost • $100 price • $40 gross profit • 40% margin • 66.67% markup.
Setting a price using a target margin
If you want a 40% margin on a product that costs $60, divide $60 by (1 − 0.40). That gives a $100 target sale price. Simply adding 40% to $60 would produce $84, which is only a 28.57% gross margin.
When the formulas need more inputs
These calculations use gross unit economics. A fuller business profit model should also account for processing or marketplace fees, packaging, postage, returns, discounts, and overhead. For a digital item with effectively zero incremental unit cost, markup is mathematically undefined, even though margin may still be computed.
Use a consistent metric
Use markup when discussing how much is being added to cost; use margin when discussing how much of a sale remains after a given cost. Specify whether percentages refer to gross profit or a more complete net-profit figure so team members are comparing like with like.
Try the free Margin vs. Markup Calculator for your own numbers. The Reseller Profit Calculator can model more transaction-level expenses.