Margin vs. Markup: What’s The Difference? (2025 Guide)

Understanding the difference between margin and markup is essential for every small business owner, contractor, or freelancer looking to price services profitably. While the two concepts are closely related, they measure different things: markup determines how much you add to your costs to set a selling price, while margin measures how much profit you keep from that sale. Confusing these terms can lead to underpricing, overpricing, or missing your revenue goals.

In this 2025 guide, we’ll clearly explain margin vs. markup with real-world examples, easy-to-follow formulas, and a visual comparison chart. You’ll also learn how to calculate both in Excel or using online calculators, and how to apply these numbers strategically to grow your business. Whether you run a retail shop, a service-based business, or a construction company, this article will give you practical pricing knowledge to stay competitive and profitable.

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Source: Freepik

Profit Margin vs. Markup: An Overview

The main difference between margin and markup lies in what they measure and how they’re calculated. Markup refers to the amount by which the cost of a good is increased to get to the final selling price, while profit margin refers to sales minus the cost of goods sold.

Think of it this way: markup looks at your cost price and shows how much you’re adding on top. Margin looks at your selling price and shows what percentage becomes profit. Both help you understand profitability, but they tell different stories about your pricing strategy.

An appropriate understanding of these two terms can help ensure that price setting is done appropriately. It can result in lost sales or lost profits if the price setting is too low or too high.

Terms to Understand

Before diving into calculations, let’s define the key terms you’ll need to master margin vs markup concepts.

Revenue

Revenue is the total money your business brings in from sales before costs are subtracted. It appears at the top of your income statement, which is why it’s called “top-line income.”

Example: If your landscaping business completed $50,000 worth of projects last month, that’s your revenue — regardless of costs.

Cost of Goods Sold (COGS)

COGS includes the direct costs of producing goods or services, such as materials and labor.

• Retail: wholesale price of inventory
• Construction: lumber, nails, labor
• Electrical: wire, outlets, circuit breakers

Note: COGS does not include overhead like rent, insurance, or marketing.

Gross Profit

Gross Profit = Revenue – COGS.

Example: If your revenue is $50,000 and your COGS is $30,000, gross profit = $20,000. That profit must still cover business expenses like rent or equipment.

Margin vs. Markup: Understanding the difference

Now let’s look at the core formulas that separate margin from markup. These calculations use the same numbers but measure different things.

Markup Formula: Markup % = (Selling Price – Cost) ÷ Cost × 100

Margin Formula: Margin % = (Selling Price – Cost) ÷ Selling Price × 100

Source: Indinero

The key difference is the denominator. Markup divides by cost, while margin divides by selling price. The markup is the percentage increase of the price that brings us to the revenue, while the margin is the percentage of the revenue that becomes profit.

Let’s say you buy a product for $60 and sell it for $100:

• Markup = ($100 – $60) ÷ $60 × 100 = 66.7%

• Margin = ($100 – $60) ÷ $100 × 100 = 40%

Both calculations use the same $40 profit, but they express it differently. The markup shows you marked up your cost by 66.7%, while the margin shows that 40% of your selling price becomes profit.

Understanding this difference helps you communicate clearly with suppliers, compare your performance to industry benchmarks, and make informed pricing decisions. 

Tip! Resources like Investopedia provide additional context on these financial concepts.

How to Calculate Markup and Margin: Step-by-Step Guide

Converting Between Markup and Margin

Sometimes you’ll need to convert between these two measurements. To calculate the markup from the margin, follow these easy steps: 

If you know the margin as a percentage, divide it by 100 to find its decimal value. Find the decimal markup with the following formula: markup = 1/(1 − margin) − 1. Multiply the result by 100% to find the percentage markup.

Example: If you have a 40% margin:

1. Convert to decimal: 40% = 0.40
2. Apply formula: markup = 1/(1 – 0.40) – 1 = 1/0.60 – 1 = 1.67 – 1 = 0.67
3. Convert to percentage: 0.67 × 100 = 67% markup

Using Online Calculators

Online tools like the Omni Calculator’s margin tool can help you quickly compare different pricing scenarios. These calculators are especially useful when you want to test multiple price points to find your optimal profit range.

You can also try our free Profit Margin Calculator for quick calculations.

Markup vs Margin Comparison Chart

Here’s a helpful table showing how markup and margin percentages relate to each other:

Real Life Examples About Using Margins and Markups

Let’s explore how different types of businesses apply margin and markup in their daily operations.

Example 1: Construction Small Business

Mike runs a small construction company specializing in bathroom remodels. He recently quoted a project that will cost him $8,000 in materials and labor. His goal is to achieve a 25% profit margin.

• With a 25% margin:
  Selling Price = Cost ÷ (1 – Margin %)
  Selling Price = $8,000 ÷ (1 – 0.25) = $10,667
• With a 25% markup:
  Selling Price = Cost × (1 + Markup %)
  Selling Price = $8,000 × 1.25 = $10,000

The difference is $667, which is significant enough to impact profitability and cash flow. By understanding both methods, Mike can choose the approach that best fits his financial goals.

Example 2: Electrical Contractor

Sarah operates an electrical contracting business and needs to price a commercial wiring job. Her direct costs total $5,000. She wants to compare scenarios using a 40% margin vs. a 40% markup.

• With a 40% markup:
  Selling Price = $5,000 × 1.40 = $7,000
  Profit = $2,000
  Margin = $2,000 ÷ $7,000 = 28.6%
• With a 40% margin:
  Selling Price = $5,000 ÷ (1 – 0.40) = $8,333
  Profit = $3,333
  Markup = $3,333 ÷ $5,000 = 66.7%

Sarah sees that using a margin target gives her more predictable profitability, which helps with projections and long-term planning.

Example 3: Landscaping Business

Tom owns a landscaping company that handles both retail plant sales and service projects. He uses different approaches depending on the business segment:

• Retail plants (100% markup):
  If his cost is $50, he sells for $100.
  This equals a 50% margin.
• Landscaping services (35% margin):
  If his cost for a project is $1,000, selling price = $1,000 ÷ (1 – 0.35) = $1,538.
  This ensures he covers labor, equipment, and overhead.

By combining markup for retail and margin for services, Tom keeps plant prices competitive while ensuring service work remains sustainably profitable.

What Is the Direct Cost of a Product?

Direct costs are the expenses tied directly to creating a product or service. They can be fixed or variable, often shifting with inflation.

• Products: raw materials, manufacturing labor, packaging, shipping
• Services: job-specific materials, direct labor hours, subcontractor fees

Examples: a restaurant’s ingredient costs, a furniture maker’s wood and hardware, or a plumber’s pipes and fittings.

Indirect costs like rent, utilities, or marketing don’t count — those are covered by gross profit. 

For more context, see our guide on assets and liabilities.

Do Other Factors Affect a Product’s Selling Price?

Pricing depends on both internal and external factors:

• Internal factors (within your control):
  • Cost of goods sold (COGS)
  • Overhead costs like labor, rent, or materials
  • Desired margin or markup strategy
• External factors (outside your control):
  • Inflation – rising costs of materials or labor can force price adjustments
  • Competitor pricing – if similar businesses charge less, you may need to adjust or differentiate your offer
  • Market demand and supply – customers will pay more for products or services in high demand or short supply

Other key influences on pricing include:

• Customer perception
  • Luxury brands often use higher markups because customers associate price with quality
  • Budget-focused businesses may rely on lower margins to attract price-sensitive buyers
• Cash flow needs
  • If you need quick cash, you might accept lower margins on certain jobs
  • When cash flow is strong, you can be more selective and maintain higher margins.

Why Is Price Setting Important?

The sales price of a product drives revenue, profitability, and competitiveness. Set prices too low and you’ll struggle to cover costs; set them too high and customers may turn to competitors.

Smart pricing helps you:

• Cover expenses and generate profit for growth
• Stay competitive in your market
• Communicate value to customers

It also impacts operations. Higher prices allow for better materials and skilled staff, while lower prices may lead to cost-cutting that reduces quality. From a financial perspective, consistent pricing supports budgeting and forecasting. When you know your margins, you can better predict cash flow patterns and make informed decisions about expansion or investment.

Why do margins and markups matter?

Understanding both margin and markup gives you powerful tools for managing and growing a business. These metrics let you compare performance across products, services, or time periods — and they’re critical for financial planning.

• Margins show what percentage of each sale becomes profit, making them essential for budgeting, forecasting, and setting revenue targets.
• Markups help with competitive analysis and supplier negotiations by showing how much you add to costs when setting prices.
• Profitability insights: Together, margins and markups reveal your most and least profitable offerings, so you can focus on the areas that drive growth.
• Financial credibility: Consistent margins signal stability to lenders and investors, improving your chances of securing financing on better terms.

Practical Tools and Resources

Several tools can help you calculate and track margins and markups more efficiently:

• Spreadsheet Templates
  Build Excel sheets with formulas for cost, markup %, margin %, selling price, and profit. This ensures consistency across all your pricing decisions. CFI provides several financial modeling templates.
• Online Calculators
  Tools like the Omni Calculator make it easy to test pricing scenarios. You can also try Invoice Fly’s free Profit Margin Calculator and Free Invoice Generator to quickly see how margins affect your revenue and invoices.
• Professional & Accounting Software
  Consider pricing tools that integrate with your accounting system to automate calculations. Platforms like QuickBooks help balance pricing with profitability, Stripe emphasizes cash flow management, and free tools like WaveApps make it easier to track margins, expenses, and profitability day-to-day.

Common Pricing Mistakes to Avoid

Understanding these common pitfalls can save you from costly pricing errors:

1. Using terms interchangeably – Always specify whether you’re discussing markup or margin to avoid confusion
2. Ignoring overhead costs – Make sure your margin covers all business expenses, not just direct costs
3. Copying competitor pricing blindly – Your cost structure may differ significantly from competitors
4. Not reviewing prices regularly – Market conditions and costs change over time
5. Focusing only on cost-plus pricing – Consider market demand and customer value perception

Final Thoughts!

Mastering the difference between margin and markup puts you in control of your business pricing and profitability. Markup usually determines how much money is being made on a specific item relative to its direct cost. Profit margin considers how much money is made relative to revenue.

Remember that markup shows how much you add to cost, while margin shows what percentage of your selling price becomes profit. Both numbers matter, but they serve different purposes in your business strategy.

Start by calculating both margin and markup for your current products or services. This baseline helps you identify opportunities for improvement and ensures you’re pricing competitively while maintaining profitability.

Consider creating pricing tables or using online calculators to speed up your decision-making process. The time invested in understanding these concepts pays off through better pricing decisions and improved cash flow management.

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