Markup vs margin: the difference, a conversion chart, and the costly mix-up
Markup and margin measure the same profit against different numbers, which is why a 50% markup is only a 33.3% margin. This guide gives the formulas, a two-way conversion chart and a converter, then covers what the mix-up costs, what a discount does to margin, and how to price services and resold work.
Markup vs margin: what is the difference?
Markup and margin both describe profit, measured against different numbers. Markup is profit as a percentage of cost; margin is profit as a percentage of the selling price. Buy something for $1,500 and sell it for $3,000, and the $1,500 profit is a 100% markup but a 50% margin. Markup is always the larger of the two.
The two words get used loosely, and that is where the trouble starts. Someone says “we work on a 30% margin” and means a 30% markup, or a supplier offers “a 50% margin” that turns out to be a 50% markup. When a number matters, ask which one it is: profit over cost, or profit over price.
Markup and margin formulas
The markup formula is (price – cost) / cost, and the margin formula is (price – cost) / price. Each can be rearranged to find a price from a cost, and each converts to the other. The table puts them side by side.
| Markup | Margin | |
|---|---|---|
| Profit divided by | Cost | Price |
| Formula | (price – cost) / cost | (price – cost) / price |
| Price from cost | cost x (1 + markup) | cost / (1 – margin) |
| Can it exceed 100%? | Yes, without limit | No. 100% would mean the cost is zero |
| Cost $1,500, price $3,000 | 100% | 50% |
| Convert to the other | margin = markup / (1 + markup) | markup = margin / (1 – margin) |
| Mostly used for | Setting prices from cost | Targets, reports and comparing products |
Worked example
Take a hypothetical service that costs you $1,500 to deliver.
- Price at a 60% markup: 1,500 x 1.6 = $2,400. Profit is $900. Margin is 900 / 2,400 = 37.5%.
- Price at a 60% margin: 1,500 / (1 – 0.6) = 1,500 / 0.4 = $3,750. Profit is $2,250. Markup is 2,250 / 1,500 = 150%.
- Check the conversion: a 60% markup as a margin is 0.6 / 1.6 = 37.5%; a 60% margin as a markup is 0.6 / 0.4 = 150%. Both match.
The same “60%” produces prices $1,350 apart. That gap is the whole reason the distinction matters.
Markup to margin conversion chart
A markup to margin conversion chart lists common markups with the margin each one produces, so you can convert without a calculator. Both charts below are calculated from the formulas above; sort either column, or type a figure to filter.
| Markup | Margin | Price |
|---|---|---|
| 10% | 9.1% | $110 |
| 15% | 13.0% | $115 |
| 20% | 16.7% | $120 |
| 25% | 20.0% | $125 |
| 30% | 23.1% | $130 |
| 33.3% | 25.0% | $133.30 |
| 40% | 28.6% | $140 |
| 50% | 33.3% | $150 |
| 60% | 37.5% | $160 |
| 66.7% | 40.0% | $166.70 |
| 75% | 42.9% | $175 |
| 80% | 44.4% | $180 |
| 100% | 50.0% | $200 |
| 125% | 55.6% | $225 |
| 150% | 60.0% | $250 |
| 200% | 66.7% | $300 |
| 300% | 75.0% | $400 |
| Margin | Markup | Price |
|---|---|---|
| 10% | 11.1% | $111.11 |
| 15% | 17.6% | $117.65 |
| 20% | 25.0% | $125.00 |
| 25% | 33.3% | $133.33 |
| 30% | 42.9% | $142.86 |
| 35% | 53.8% | $153.85 |
| 40% | 66.7% | $166.67 |
| 45% | 81.8% | $181.82 |
| 50% | 100.0% | $200.00 |
| 55% | 122.2% | $222.22 |
| 60% | 150.0% | $250.00 |
| 65% | 185.7% | $285.71 |
| 70% | 233.3% | $333.33 |
| 75% | 300.0% | $400.00 |
| 80% | 400.0% | $500.00 |
| 90% | 900.0% | $1,000.00 |
Two rows are worth remembering. A 100% markup is a 50% margin: doubling the cost. And a 50% markup is a 33.3% margin, the figure behind most of the confusion, because people expect 50% to mean the same thing both ways.
Markup and margin converter
The converter takes a cost and whichever number you know, markup, margin or price, and gives the other three. It uses the same formulas as the charts.
Enter your cost, say whether you know the markup, the margin or the price, and type that number.
Check every result against two things. A negative margin means the price is below cost. And a markup that looks generous can still give a margin below the target your overheads need, which the section on setting a margin target below shows how to work out.
For pricing a resold service with your own hours and payment fees included, the markup calculator has a resold-service mode and a price-list mode for converting many costs at once.
Why mixing up markup and margin costs money
Mixing up markup and margin costs money in one direction: applying a margin target as a markup always gives a lower margin than intended. A business that wants 40% margins and adds 40% to cost ends up at 28.6%. The table shows the gap at common targets.
| Target margin | Margin you get | Markup needed |
|---|---|---|
| 20% | 16.7% | 25.0% |
| 25% | 20.0% | 33.3% |
| 30% | 23.1% | 42.9% |
| 40% | 28.6% | 66.7% |
| 50% | 33.3% | 100.0% |
| 60% | 37.5% | 150.0% |
In money, take the $1,500 service again with a 40% margin target. The right price is 1,500 / 0.6 = $2,500, which makes $1,000 profit. Adding 40% gives $2,100, which makes $600. The mix-up loses $400 on every sale, 40% of the profit the business was planning on.
The reverse mix-up also happens, more quietly. A supplier or partner who says “you will make 50%” may mean 50% on cost, which is a 33.3% margin. Ask for the price and the cost and work it out yourself.
Markup vs margin for services and resold work
For services and resold work, the cost in both formulas has to include every cost of delivering the sale, not only what you pay a supplier. That usually means your own or your team’s time, and the fees on taking payment. Leave them out and both markup and margin look better than they are.
A hypothetical agency resells a monthly service it buys for $1,650 and sells for $3,250. On the supplier’s price alone, the margin is 1,600 / 3,250 = 49.2%. But someone at the agency spends 6 hours a month managing the account, at $50 an hour, and card fees take 3% of the price. The real cost is 1,650 + 300 + 97.50 = $2,047.50, so the real margin is 1,202.50 / 3,250 = 37.0%, and the real markup is 58.7% rather than 97.0%.
- Time is a cost. Price it at what an hour costs you, salary and overheads included, not at zero because you would be working anyway.
- Fees scale with the price. A percentage fee cannot be added to cost before you know the price, so solve for price with price = (fixed costs) / (1 – fee rate – target margin).
- Hours drift upwards. A client who needs more attention than expected raises your cost without changing the supplier’s invoice. Track hours per account for the first few months.
The same arithmetic sits behind white-label and reseller pricing, which what white-label SEO is and how it works covers from the agency’s side, with a calculator for what you keep on a resold retainer.
Fees on ad spend and other pass-through costs
When an agency bills a client for media or software it buys on their behalf and adds a fee, the fee is a markup on the pass-through cost. A hypothetical fee of 15% of ad spend, billed on top of $10,000 of spend, makes an invoice of $11,500. The fee is a 15% markup on the spend but only a 13.0% margin on the invoice, because the invoice includes the spend. If the client pays the platform directly and the agency invoices only its fee, the agency’s revenue is the fee alone, and its margin depends on the time the account takes, not on the spend.
Hourly rates are a markup on labour cost
For a business that sells time, the hourly rate is a markup on what an hour costs. If an hour of a specialist’s time costs $40 in pay and overheads and you charge $100, the markup is 150% and the margin is 60%. Only hours that are billed earn that margin, so the margin across all paid hours is lower whenever some hours go unbilled.
What a discount does to your margin
A discount comes straight out of profit, so it reduces margin by more than its own size. On a 40% margin, 10% off the price leaves a 33.3% margin, and you need 33.3% more sales just to earn the same gross profit. The formula is new margin = (margin – discount) / (1 – discount), assuming the cost of each sale does not change.
The table shows how many more sales each discount needs, at a range of margins. The lower the margin, the faster it climbs.
| Margin before | 5% off | 10% off | 15% off | 20% off |
|---|---|---|---|---|
| 20% | 33.3% | 100.0% | 300.0% | Not possible |
| 30% | 20.0% | 50.0% | 100.0% | 200.0% |
| 40% | 14.3% | 33.3% | 60.0% | 100.0% |
| 50% | 11.1% | 25.0% | 42.9% | 66.7% |
| 60% | 9.1% | 20.0% | 33.3% | 50.0% |
Read across the 20% margin row: a 10% discount needs twice as many sales, and a 20% discount leaves no profit at all. That is why low-margin businesses are careful with promotions, and why a discount should have a reason, such as clearing stock, winning a long contract or a volume order, rather than being a habit.
How to set a margin target from your overheads
A margin target should come from what the business has to pay for, not from habit or a competitor’s number. The gross margin you need is your overheads plus the net profit you want, divided by the revenue you expect: required gross margin = (overheads + target profit) / revenue.
Take a hypothetical agency expecting $500,000 of revenue next year. Its overheads, the costs that do not rise with each sale such as salaries for non-billable staff, software, rent and insurance, come to $150,000, and it wants $50,000 of net profit before tax. The gross margin it needs is (150,000 + 50,000) / 500,000 = 40%. Converted, that is a 66.7% markup on the direct cost of every sale.
- List the overheads for the year: everything that does not change with one more sale.
- Decide the profit you want left after them.
- Estimate revenue conservatively. If it comes in lower, the same overheads need a higher margin.
- Divide overheads plus profit by revenue. That is the gross margin every sale must average.
- Convert to a markup for pricing, and recalculate when overheads or revenue change.
Run the sum with a lower revenue figure as well. At $400,000 of revenue, the same overheads and profit need (150,000 + 50,000) / 400,000 = 50%, a 100% markup. A business pricing for its best year is underpriced in an ordinary one.
Margin across several products or clients
The margin across several products or clients is total profit divided by total revenue, not the average of their margins. Averaging the percentages gives a small, low-margin line the same weight as a large one, which usually makes the business look more profitable than it is.
A hypothetical agency has two clients. Client A pays $1,000 a month at a 60% margin, so $600 profit. Client B pays $4,000 a month at a 25% margin, so $1,000 profit. The average of the two margins is 42.5%, but the business makes $1,600 on $5,000 of revenue, which is 32%. The large, thin client sets the real figure.
The same applies to a price list with many products. Report margin as total profit over total revenue for the period, and look at each line’s margin separately to find the ones dragging the total down. A line with a low margin can still be worth keeping if it brings in clients who buy higher-margin work, but that should be a decision, not something nobody noticed.
Common markup and margin mistakes
Most markup and margin errors come from what goes into the cost and the price, not from the formulas. These are the ones that show up most in practice.
- Calculating on a price that includes sales tax or VAT. The tax is collected for the government, not earned. Use the price before tax, or the margin will look higher than it is.
- Leaving costs out of cost. Shipping, payment fees, packaging, subcontractor time and your own hours all belong in the cost of a sale.
- Reporting margin on the list price after discounting. Margin should be measured on the price the customer actually paid.
- Mixing units in one document. A proposal that quotes “30% margin” from one person and “30% on top” from another hides a 7-point difference: a 30% markup is a 23.1% margin.
- Rounding the conversion. A 40% margin needs a 66.7% markup. Rounding it to 60% gives a 37.5% margin, and on a large price list the shortfall adds up.
- Using keystone pricing without checking it. Keystone pricing, doubling the cost, is a 100% markup and a 50% margin. It is a convention, not a guarantee that the margin covers your overheads.
Gross margin, contribution margin and net margin
“Margin” on its own usually means gross margin, but not always, so a margin target needs its type stated. The three common types subtract different costs from the price, and each answers a different question.
- Gross margin: price minus the direct cost of what was sold, divided by price. The figure the formulas in this guide calculate, and the one markup converts to.
- Contribution margin: price minus all the costs that rise with each sale, including sales commission and payment fees, divided by price. Useful for deciding whether one more sale or one more client is worth taking.
- Net margin: profit after every cost, including rent, salaries and tax, divided by revenue. A figure for the whole business over a period, not for one product or price.
Markup has no common equivalent of net margin. It is a pricing tool, used on the direct cost of a product or service. If someone quotes a markup for a whole business, ask what cost they divided by.
Reporting these consistently is part of a wider measurement habit; the guide to marketing metrics covers gross margin alongside customer acquisition cost and payback, which both depend on it.
When to use markup and when to use margin
Use margin to set targets and report results, and markup to turn a cost into a price. Margin is what profit and loss statements and most financial reporting are built on, and it can be compared across products with different costs. Markup is easier to apply when the cost is the number you have in front of you.
- Set the target in margin. Decide the gross margin each product, service or client must make.
- Convert it to a markup once. Markup = margin / (1 – margin), so a 40% margin target becomes a 66.7% markup.
- Price from cost with that markup. Cost x 1.667, which a price list or spreadsheet can apply to every line.
- Report in margin. Check the margin you actually earned against the target, after discounts and the costs that were missed.
Spreadsheet formulas
In Excel or Google Sheets, with the cost in A2 and the price in B2, these formulas give each figure. Format the result cells as percentages.
| To find | Formula | Example result (A2 = 1500, B2 = 3000) |
|---|---|---|
| Markup | =(B2-A2)/A2 |
100% |
| Margin | =(B2-A2)/B2 |
50% |
| Price from a markup in C2 | =A2*(1+C2) |
3,000 with C2 = 100% |
| Price from a margin in C2 | =A2/(1-C2) |
3,000 with C2 = 50% |
| Margin from a markup in C2 | =C2/(1+C2) |
50% with C2 = 100% |
| Markup from a margin in C2 | =C2/(1-C2) |
100% with C2 = 50% |
Budgets work the same way from the other side: a client budgeting for a service is deciding what they will pay, which becomes your price. Setting an SEO budget from the work shows how a buyer builds that number from the hours and deliverables, which is a useful check on whether your price is defensible.
Markup divides profit by cost; margin divides it by price. Set targets in margin, because that is how profit is reported, and convert to markup only to turn a cost into a price. Count every cost, including your own time and payment fees, and check what a discount does to margin before you offer it.
The habit that prevents most of this is writing the unit next to the number every time: “40% margin” or “40% on cost”, never “40%”. It costs two words and removes the question.
For resold work, the second habit is putting your own hours into the cost before calculating either figure. A margin that only looks healthy because your time is free is not a margin.
Frequently asked
What is the difference between markup and margin?
How do you convert markup to margin?
How do you convert margin to markup?
Is a 50% markup the same as a 50% margin?
Can margin be more than 100%?
Should I price using markup or margin?
How does a discount affect margin?
What is a good profit margin?
The markup calculator prices a resold service with your own hours and payment fees included, and shows the price that leaves the margin you want.
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