Margin vs. Markup
These two numbers are calculated from the same inputs — price and cost — but they answer different questions, and confusing them leads to underpricing.
The definitions
Markup = (Price − Cost) / Cost Margin = (Price − Cost) / Price
Worked example
A service costs you $60 to deliver and you sell it for $100.
- Markup: ($100 − $60) / $60 = 66.7%
- Margin: ($100 − $60) / $100 = 40%
Same transaction, two different-looking numbers. A common and costly mistake is aiming for "40% profit" but applying it as a 40% markup instead of a 40% margin — that under-prices the job because markup and margin diverge more as the target percentage increases.
Why it matters for target-margin pricing
If you want a true 40% contribution margin and your cost is $60, the correct price is Cost / (1 − Margin) = $60 / 0.60 = $100 — not $60 × 1.40 = $84, which only yields a 28.6% margin.
Related tools
Put margin and markup into practice
Pick one convention for internal planning and label it clearly in every spreadsheet, proposal and dashboard. If suppliers or teammates use markup while you manage by margin, convert the figures before comparing them.
A reliable workflow
- Store cost and selling price separately so either percentage can be recalculated.
- Stress-test the selling price when cost changes instead of preserving the old dollar profit blindly.
- Review gross margin by service or product family, not only at company level.
Frequent mistakes
- A 50% markup produces a 33.3% margin, not a 50% margin.
- Gross margin does not include every operating expense or tax.
- Discounting the selling price changes margin faster than many teams expect.