Profit Margin vs. Markup: What's the Difference?

As a business owner, you’ve probably heard the terms “profit margin” and “profit markup” at some point in your experience. But don’t let the similarities fool you — while these terms both deal with sales, pricing, and financial productivity, they are not interchangeable! Knowing the difference between profit markup and profit margin is a must when it comes to setting prices that actually lead to profits for your company.

If you’re unsure about what profit markup and margins are, or how they differ, you’re in the right place. In today’s blog post, I’ll be simplifying these accounting concepts so that you can set your business up for success financially moving forward.

Before we dive in…

There are a few “pre-requisite” terms you should have a solid understanding of in order to fully grasp the difference between markup vs. margin. Here’s a brief explanation of each:

• Gross profit: Your gross profit is what you get when you subtract your COGS from your revenue. In other words, this is what is left over once you pay the expenses of making your products or providing your services.

Now that you know what these pre-requisite terms mean, we can explore what markup and margin actually are and how they differ.

What is “profit margin”?

Your profit margin shows the revenue you make after paying COGS. Essentially, your profit margin is the difference between what you earned and how much you spent to earn it.

To calculate profit margin, you’ll need to start by looking at your gross profit (the difference between your revenue and COGS). Then, you’ll want to find the percentage of the revenue that is gross profit by dividing your gross profit by revenue. Simply multiply this number by 100 to get your margin percentage!

Let’s make things even simpler by condensing this process into a profit margin formula:

Margin = [(Revenue - COGS) / Revenue] x 100 or (Gross Profit / Revenue) x 100

This formula measures how much of every dollar in revenue you keep after paying your expenses. You want your profit margin to be as high as possible, as this indicates you’re keeping a greater percentage of revenue when you make a sale.

If you’re still a little confused about what this looks like in practice, I’ve got you covered with an example.

Let’s say you sell skincare kits for $200 each. Each skincare kit costs you $150 to make. To start, you’ll want to plug these numbers into the formula. It will look something like this…

Profit margin formula

Margin = [($200 - $150) / $150] x 100 

Then, you’ll find your gross profit by subtracting your COGS ($150) from your revenue ($200), ending up with $50. You’ll divide that $50 by your revenue ($200) to get 0.25. Simply multiply it by 100 to turn it into a percentage, and you end up with 25%.

Margin = 25%

Generally speaking, anything above 20% is considered a high profit margin, although this is industry-specific.

What is “profit markup”?

Like margins, profit markups also take COGS and revenue into consideration. But in this case, the information is designed to show you how much more your selling price is than the amount the item costs you.

To calculate your profit markup, start with your gross profit, or (Revenue - COGS). Then, find the percentage of the COGS that is gross profit by dividing your gross profit by COGS instead of revenue. In a formula, it will look like this:

Profit markup formula

Markup = [(Revenue - COGS) / COGS] x 100 or (Gross Profit / COGS) x 100

This formula measures how much more you sell your items for than the amount you pay for them. The higher the markup, the more revenue you keep when you make a sale.

Let’s go back to our example before (you sell skincare kits for $200 each, and they cost $150 each to make) and calculate the markup percentage. Your first step will be to plug your existing numbers into the formula.

Markup = [($200 - $150) / $150] x 100

Then, you’ll find your gross profit by subtracting your COGS ($150) from your revenue ($200), ending up with $50. Then, you’ll divide that $50 by your COGS ($150) to get 0.33. Multiply it by 100 to turn it into a percentage, and you end up with 33%.

Markup = 33%

And there you have it! Now you know how to calculate your margin and markup. As you can see, the math involved is as straightforward as can be.

But what if you know your markup and you want to convert it to get your margin (or vice versa) — what then?

The good news is that markups and margins interact in a highly predictable way. Each markup relates to a specific margin and vice versa, and markups will always be higher than their corresponding margins. So, you have two options!

The first option is you can use the chart provided below to find quick conversions for markups and margins.

If there comes a time you need to mark up products by a number not included in the above chart, your second option is a simple conversion formula!

Markup to margin conversion formula
Margin = [Markup / (1 + Markup)] x 100

If you want to know what a markup of 60% looks like for your margins, you can find this by plugging 0.60 into the above formula.

Margin = [0.60 / (1 + 0.60)] x 100 = 37.5%

Margin to markup conversion formula
Markup = [Margin / (1 - Margin)] x 100

The formula for converting margins to markups is similar with one key difference. Instead of adding 1 to our markup, we are subtracting our margin from 1.

Let’s pretend that you’re deadset on a 35% margin, and you want to know what your markup will be. All you need to do is plug 0.35 into the formula to figure it out.

Markup = [0.35 / (1 - 0.35)] x 100 = 54%

So, if you want a margin of 35%, you know your markup must be set at approximately 54%.

Why does any of this matter?

Understanding the difference between profit margins and markups is instrumental in strategically pricing your products and/or services for maximum earning potential. If you’re not familiar with these accounting concepts, you could be losing out on thousands (or millions) in potential revenue.

As a business consultant, I know that numbers are not every business owner’s strong suit. If you fall into this category too, my biggest piece of advice for you is to consult with a professional in regard to your profit margins and markups to make sure it all makes sense in the context of your pricing. 

If you want to break down the nitty gritty of your pricing and product portfolio alongside a 7-figure business consultant (that’s me!), I offer this service via my strategy intensive sessions. In just 90 minutes together, we can create an entire pricing plan that is optimised to bring in even more cash flow while allowing you to reach your goals. You can learn more about setting up a strategy call here.