Margin vs Markup: The 60-Second Version

Both are "the bit above cost, as a percentage." They differ only in what you divide by — and that one difference is why a store can add 40% to everything, feel comfortable, and still be running on a 29% margin it never agreed to.

The two formulas

markup % = (price − cost) ÷ cost  × 100      ← divided by COST
margin % = (price − cost) ÷ price × 100      ← divided by PRICE

Cost $10, price $15. The $5 of profit is a 50% markup (5 ÷ 10) and a 33.3% margin (5 ÷ 15). Same transaction, two numbers, both correct.

Because price is always larger than cost, margin is always the smaller number. That's the entire trap: the mix-up can only ever flatter you.

Conversion table

To convert without the table:

margin = markup ÷ (1 + markup)
markup = margin ÷ (1 − margin)

Pricing from a target margin

This is the formula worth memorising, because it's the one you need whenever a cost changes:

price = cost ÷ (1 − target margin)

Want 40% margin on a $9.00 part? 9 ÷ 0.60 = $15.00. Note that adding 40% to $9.00 gives $12.60 — a 28.6% margin, a full 11 points short. On a catalog of thousands of SKUs, that gap is the difference between a healthy year and a puzzling one.

Two places the confusion shows up in real stores

1. Talking to suppliers

Distributor price sheets — especially in auto parts and hardware — are built around markup and discount ladders: list price, jobber, "40 off list", net. "You'll make 40 points on this line" from a rep usually means markup on their net price, and almost never accounts for your freight, your payment fees, or the fact that you'll discount some of it. Convert to your margin at your actual retail before you believe any of it.

2. After a cost increase

Someone raises the price by the same dollars the cost went up — and is genuinely surprised when the margin percentage still ends up lower than before. That's not a mistake in arithmetic, it's a mismatch of goals: adding the dollars defends your profit per unit, while dividing defends your margin. Both are valid; you just need to know which one you're choosing. Worked example: recalculating your margin after a cost increase.

Which should you use?

Use markup when you're setting a price from a cost — it's the natural direction for a buyer and it's how supplier terms are quoted. Use margin for everything else: reporting, targets, comparisons between products, and any sentence containing the word "profitable." Margin is what your P&L speaks, what Shopify's analytics show, and what other merchants mean when they compare numbers.

The practical rule: set prices with markup, judge the business with margin, and never let the two share a label in a spreadsheet.