Margin and markup are not the same number
Both describe the same profit. They divide it by different things. Margin divides profit by the selling price. Markup divides profit by the cost. Because the price is larger than the cost, the margin is always the smaller percentage.
Worked example
Something costs you $60.00 and you sell it for $100.00. The profit is $40.00. Divided by the price, that is a margin of 40%. Divided by the cost, it is a markup of 66.67%.
Setting a price from a target margin
To hit a margin you divide the cost. You do not multiply it.
The common mistake is to treat a margin target as a markup. If you want a 40% margin on a $60.00 cost, the right price is $100.00. Adding 40% to the cost gives $84.00, and the margin on that price is only 28.57%.
Markup to margin at a glance
| Markup | Margin |
|---|---|
| 10% | 9.09% |
| 20% | 16.67% |
| 25% | 20% |
| 50% | 33.33% |
| 75% | 42.86% |
| 100% | 50% |
| 200% | 66.67% |
Questions
Can a margin be more than 100%?
No. Margin is the share of the price that is profit, so with any cost above zero it stays below 100%. Markup has no upper limit.
Should I include sales tax, VAT or GST?
If you collect the tax from customers and pass it on to the tax authority, leave it out of both the cost and the price. If you cannot reclaim the tax you pay on purchases, that tax is part of your cost. Use the sales tax and VAT calculator to strip tax from a price first.
What does this tool leave out?
It looks at one item or job. It does not spread rent, software, salaries or other overheads across your sales. For that, use the break-even calculator.