Margin and markup calculator: set prices without mixing them up
Gross margin is profit as a percentage of the selling price; markup is profit as a percentage of cost. A product that costs 60 and sells for 100 earns 40 profit: a 40% margin but a 66.67% markup. To hit a target margin, divide cost by one minus the margin: 60 / 0.6 = 100.
Calculate margin, markup and price
Results
- Gross margin
- 40%
- Markup
- 66.67%
- Selling price
- 100.00
- Cost per unit
- 60.00
- Gross profit per unit
- 40.00
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Margin and markup formulas
Both measure the same profit. They differ only in the base: margin divides by the selling price, markup divides by the cost, so markup is always the larger number.
- Gross profit
- Profit = Price - Cost
- Gross margin
- Margin = (Price - Cost) / Price
- Markup
- Markup = (Price - Cost) / Cost
- Price from a target margin
- Price = Cost / (1 - Margin)
- Price from a markup
- Price = Cost × (1 + Markup)
- Markup to margin
- Margin = Markup / (1 + Markup)
- Margin to markup
- Markup = Margin / (1 - Margin)
Worked example: pricing a product line
A retailer buys a lamp for 60. Its owner wants a 40% gross margin, so the price is 60 / (1 - 0.40) = 100. Profit per lamp is 40, which is 40% of the price and 66.67% of the cost.
If the owner had instead applied a 40% markup, the price would be 60 × 1.40 = 84, profit 24 and the margin only 28.6%. Confusing the two is the most common pricing error in small businesses, and on 1,000 lamps it costs 16,000 in gross profit.
| Markup on cost | Gross margin on price | Price for a cost of 100 |
|---|---|---|
| 25% | 20% | 125 |
| 33.33% | 25% | 133.33 |
| 50% | 33.33% | 150 |
| 66.67% | 40% | 166.67 |
| 100% | 50% | 200 |
| 150% | 60% | 250 |
| 200% | 66.67% | 300 |
Assumptions behind the result
- Cost is the full landed cost of one unit: purchase price plus freight, duties and handling, or the production cost for goods you make.
- Prices and costs exclude recoverable VAT.
- Gross margin covers only the cost of goods sold. Operating expenses such as rent and salaries come out of it later, so a positive gross margin does not guarantee a net profit.
- Discounts, returns and payment fees are not deducted; enter the net price you actually expect to receive.
Margin or markup: which should you use?
Use markup when you build a price from cost, and margin when you analyse profitability. Financial statements report gross margin, because it is gross profit divided by revenue, so targets set in margin terms tie directly to the income statement.
Markup is handy at the shop counter: cost × 1.5 is quick. Just remember that a 50% markup gives a 33.33% margin, not 50%.
How margin connects to break-even
Gross margin is close to, but not the same as, the contribution margin used in break-even analysis. Contribution margin subtracts every variable cost, including sales commissions and card fees, while gross margin subtracts only the cost of goods sold.
Once you know the contribution per unit, the break-even calculator tells you how many units cover your fixed costs.
Inventory cost method changes the margin
When purchase prices rise, the cost you match against a sale depends on the inventory method. Under FIFO the oldest, cheaper units are expensed first and the margin looks higher; under weighted average the margin reflects a blend. Compare both with the FIFO vs weighted average calculator.
How to set a price from a target gross margin
- 1
Find the full unit cost
Add the purchase price, freight, duties and handling for one unit.
- 2
Choose a target margin
Pick the gross margin you need to cover operating expenses and profit, for example 40%.
- 3
Divide
Divide the cost by one minus the margin: 60 / 0.60 = 100.
- 4
Check the markup
Compute (price - cost) / cost to see the equivalent markup for your price list.
- 5
Review against the market
Compare the price with competitors and adjust volume or cost assumptions if it is out of range.
Frequently asked questions
Is a 50% markup the same as a 50% margin?
No. A 50% markup on a cost of 100 gives a price of 150 and a margin of 33.33%. A 50% margin needs a price of 200, which is a 100% markup.
What is a good gross margin?
It depends on the industry. Grocery retail often runs below 30%, while software and services can exceed 70%. Compare with businesses that have a similar cost structure, and make sure the margin covers your operating expenses.
Can a margin be more than 100%?
No. Margin is profit divided by price, and profit can never exceed the price unless cost is negative. Markup, on the other hand, can be any positive percentage: a 300% markup is common for some goods.
How do I convert markup to margin?
Divide the markup by one plus the markup. A 25% markup is 0.25 / 1.25 = 20% margin. To go the other way, divide the margin by one minus the margin.
Should VAT be included when calculating margin?
No. VAT collected on sales is owed to the tax authority, so calculate margin on net prices. Use the VAT calculator to strip VAT from gross prices first.
More free calculators
All free tools- Break-even calculatorUnits and sales you need to cover fixed costs, plus target profit volume and margin of safety.
- VAT calculatorAdd VAT to a net price or extract it from a gross amount, at any rate.
- Depreciation calculatorYearly depreciation schedule with straight-line, declining balance, sum-of-years' digits or units of production.
- Loan amortization calculatorMonthly payment, total interest and a downloadable schedule of interest, principal and balance.
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