Margin vs Markup: Communicating and Calculating Profit Correctly

Why “Margin” and “Markup” Are Not the Same

In ecommerce, people often say “I want 50% profit” without specifying whether they mean gross margin or markup. These are different measurements with different denominators. Mixing them up is one of the fastest ways to underprice products, because a “50% markup” produces a much smaller gross margin than a “50% margin.”

• Gross margin answers: “What percentage of the selling price is gross profit?”
• Markup answers: “What percentage did I add on top of cost?”

Throughout this chapter, we’ll use a single term for cost to keep the math clean:

• Unit Cost = the per-unit cost you are pricing from (whatever your business defines as the cost base for pricing decisions). The key is to be consistent about what’s included in this cost base.

Core Formulas (Keep These Handy)

Definitions

Let:

• P = selling price
• C = unit cost
• GP = gross profit dollars per unit = P - C

Gross Margin

Gross margin (as a decimal):

Margin = (P - C) / P

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Gross margin (as a percent):

Margin% = ((P - C) / P) × 100

Markup

Markup (as a decimal):

Markup = (P - C) / C

Markup (as a percent):

Markup% = ((P - C) / C) × 100

How Confusing Them Causes Underpricing

Suppose your unit cost is C = $40.

Scenario A: You want a 50% gross margin

Use the margin pricing formula (derived below):

P = C / (1 - Margin)

P = 40 / (1 - 0.50) = 40 / 0.50 = $80

Check:

• Gross profit = 80 - 40 = $40
• Margin = 40 / 80 = 50%

Scenario B: You mistakenly apply “50%” as markup

Markup pricing formula:

P = C × (1 + Markup)

P = 40 × (1 + 0.50) = 40 × 1.5 = $60

Check margin at this price:

• Gross profit = 60 - 40 = $20
• Margin = 20 / 60 = 33.33%

Result: You thought you were pricing for “50% profit,” but you landed at 33.33% margin. That gap can erase your ability to fund marketing, discounts, and overhead.

Convert Between Margin and Markup (No Guessing)

Markup → Margin

Start with:

Markup = (P - C) / C

Then:

Margin = (P - C) / P

Conversion formula:

Margin = Markup / (1 + Markup)

Example: Markup = 50% = 0.50

Margin = 0.50 / (1 + 0.50) = 0.50 / 1.50 = 0.3333 = 33.33%

Margin → Markup

Conversion formula:

Markup = Margin / (1 - Margin)

Example: Margin = 50% = 0.50

Markup = 0.50 / (1 - 0.50) = 0.50 / 0.50 = 1.00 = 100%

This is the part many teams miss: a 50% margin requires a 100% markup.

Derive the “Price from Cost and Target Margin” Formula

If you’re targeting a gross margin, you need a direct way to compute price from cost.

Start with:

Margin = (P - C) / P

Multiply both sides by P:

Margin × P = P - C

Bring P terms together:

P - (Margin × P) = C

Factor out P:

P × (1 - Margin) = C

Solve for P:

P = C / (1 - Margin)

This is the single most useful formula when you set pricing rules by target margin.

Step-by-Step Examples With Real Numbers

Example 1: Given cost and desired margin, compute required price

Given: C = $27.50, target margin = 45% (0.45)

Step 1: Compute the margin complement: 1 - 0.45 = 0.55

Step 2: Divide cost by the complement:

P = 27.50 / 0.55 = $50.00

Step 3: Verify:

• Gross profit = 50.00 - 27.50 = $22.50
• Margin = 22.50 / 50.00 = 45%

Example 2: Given price and cost, compute margin and markup

Given: P = $120, C = $78

Step 1: Gross profit dollars:

GP = 120 - 78 = $42

Step 2: Gross margin:

Margin = 42 / 120 = 0.35 = 35%

Step 3: Markup:

Markup = 42 / 78 = 0.5385 = 53.85%

Interpretation: This product has a 35% gross margin, which corresponds to about a 53.85% markup on cost.

Example 3: Discounting impact (margin drops faster than you think)

Discounts are usually taken off price, not off cost—so margin compresses quickly.

Given: C = $30, original price P = $60 (50% margin). Run a 20% discount.

Step 1: Discounted price:

Pd = 60 × (1 - 0.20) = 60 × 0.80 = $48

Step 2: New margin:

Margin = (48 - 30) / 48 = 18 / 48 = 37.5%

Takeaway: A 20% discount took margin from 50% down to 37.5%. This is why teams that confuse markup and margin often “feel profitable” until promotions start.

Selecting Target Gross Margin Ranges (By Category and Business Model)

There is no universal “good margin.” Your target range should reflect (1) how price-sensitive the category is, (2) how much value you add (brand, bundling, exclusivity), and (3) your business model (DTC vs wholesale vs marketplace-heavy). Use ranges as a starting point, then validate against your actual operating needs.

Practical target ranges (starting points)

How to use these ranges:

• Pick a target range (e.g., 55%–65%) rather than a single number.
• Set a floor margin for “never discount below” decisions.
• Set a target margin for everyday pricing.
• Set a stretch margin for premium variants, bundles, or exclusives.

Choosing a margin target with a simple decision checklist

• How comparable is the product? More comparable usually means lower achievable margin.
• Do you compete on brand or on price? Brand-led offers can sustain higher margins.
• Is discounting frequent in your category? If yes, you need higher initial margin to survive markdowns.
• Do you have upsells/bundles? You can accept lower margin on entry items if attach rate is strong.

Quick Reference: Common Margin ↔ Markup Equivalents

Use this table to sanity-check conversations. If someone says “we’re at 60% markup,” that’s only 0.60 / 1.60 = 37.5% margin.

Practice Exercises (With Space to Work)

Exercise Set A: Given cost and desired margin, compute required price

Use: P = C / (1 - Margin)

1. A1. Cost C = $18, desired margin 40%. Find P.

   P = 18 / (1 - 0.40) = 18 / 0.60 = ?

2. A2. Cost C = $52, desired margin 55%. Find P.

   P = 52 / (1 - 0.55) = 52 / 0.45 = ?

3. A3. Cost C = $9.75, desired margin 30%. Find P.

   P = 9.75 / (1 - 0.30) = 9.75 / 0.70 = ?

4. A4. Cost C = $110, desired margin 65%. Find P.

   P = 110 / (1 - 0.65) = 110 / 0.35 = ?

Exercise Set B: Given price and cost, compute margin

Use: Margin = (P - C) / P

1. B1. Price P = $75, cost C = $45. Find margin.

   GP = 75 - 45 = ?  |  Margin = GP / 75 = ?

2. B2. Price P = $39.99, cost C = $21.50. Find margin.

   GP = 39.99 - 21.50 = ?  |  Margin = GP / 39.99 = ?

3. B3. Price P = $160, cost C = $104. Find margin.

   GP = 160 - 104 = ?  |  Margin = GP / 160 = ?

Answer Key (Check Your Work)

Set A

• A1: P = 18 / 0.60 = $30.00
• A2: P = 52 / 0.45 = $115.56 (rounded to cents)
• A3: P = 9.75 / 0.70 = $13.93
• A4: P = 110 / 0.35 = $314.29

Set B

• B1: GP = 30; Margin = 30 / 75 = 40%
• B2: GP = 18.49; Margin = 18.49 / 39.99 ≈ 46.24%
• B3: GP = 56; Margin = 56 / 160 = 35%