Profit margin vs markup: the difference that quietly costs sellers money

Both describe the gap between what something costs you and what you sell it for. They divide that gap by different numbers, so the same percentage produces different prices. Mixing them up is one of the most common reasons a small shop's real margin ends up lower than planned.

Indicative trading calculations, not VAT or accounting advice. Check VAT treatment and figures with a qualified accountant before making pricing decisions.

The two definitions

Margin (gross margin): Profit as a share of the selling price. Margin = (price − cost) ÷ price.
Markup: Profit as a share of the cost. Markup = (price − cost) ÷ cost.

Because price is always bigger than cost when you're making money, the margin percentage is always smaller than the markup percentage for the same item. Margin can never reach 100% while the item costs anything; markup has no ceiling.

Worked example: a £15 item

Say a product costs you £15.00 to buy in, ex VAT. You want "20%". Here are the two very different answers, depending on which 20% you mean.

Pricing a £15 item at '20%'
	20% markup	20% margin
Formula	£15 × 1.20	£15 ÷ (1 − 0.20)
Selling price	£18.00	£18.75
Profit per item	£3.00	£3.75
Margin achieved	16.7%	20.0%
Markup achieved	20.0%	25.0%

Pricing at £18.00 looks like "20%" but only delivers a 16.7% margin. To actually keep 20% of the selling price you need £18.75 — which is a 25% markup. The 75p gap per item sounds small; across 1,000 units it's £750 of profit you planned for but never received.

Why the shortcut "add 20%" fails

Adding 20% to cost calculates 20% of the cost. But margin targets, budgets and most business reports measure profit against revenue. Dividing by (1 − margin) is the step that turns a margin target into a price: £15 ÷ 0.8 = £18.75.

Quick conversion table

Use this to translate a margin target into the markup you'd need, and what that means for the £15 item. Markup = margin ÷ (1 − margin).

Margin to markup, with £15 cost
Target	Markup needed	Price at £15 cost
10% margin	11.1%	£16.67
20% margin	25.0%	£18.75
25% margin	33.3%	£20.00
30% margin	42.9%	£21.43
40% margin	66.7%	£25.00
50% margin	100.0%	£30.00
60% margin	150.0%	£37.50

Gross margin is not what you keep

Both numbers above only compare the product's buy-in cost with its price. A real order also carries delivery, packaging, marketplace and payment fees, returns and often advertising. That's why What's My Margin? reports contribution after marketing — the money left from each order after every per-order cost — rather than gross margin alone. A product with a healthy 40% gross margin can easily end up near zero once ads and fees are included.

Enter your own cost, fees and ad spend to see contribution per order — or set a target margin and let the calculator solve the list price.

Try your own numbers

Where VAT fits in

If you're VAT registered, calculate margin on the ex-VAT selling price. The VAT you charge a customer is collected on behalf of HMRC and is not your revenue. Using an inc-VAT price inflates your apparent margin: at a 20% VAT rate, £22.50 inc VAT is £18.75 ex VAT. Not registered? Your full price is revenue, but your costs should include any VAT you paid and can't reclaim.

Common mistakes

Agreeing a "30% margin" with a stockist while you meant 30% markup — they'll expect a lower price than you planned.
Comparing your markup with a competitor's or an industry figure quoted as a margin.
Working margin out on an inc-VAT price.
Applying a discount to a price set by markup and assuming the margin falls by the same percentage — it falls further.

Limitations

These examples use a single unit cost and ignore stock write-offs, currency movements and special VAT schemes. They're for understanding the arithmetic, not a substitute for advice from an accountant. For chains of resellers, see wholesale pricing with margins.