Profit margin vs markup explained

Profit is revenue minus cost. Margin is profit divided by revenue, times 100, and it needs revenue above zero. Markup is profit divided by cost, times 100, and it needs cost above zero. The profit margin page prints both percentages to two decimal places. The dollar sign is a label. No tax is applied and no currency is converted.

A 30% margin is not a 30% markup. Margin’s denominator is the selling price. Markup’s denominator is the cost. Using one percent as if it were the other sets the wrong price. This page is arithmetic for a single sale. It is not accounting advice, tax advice, or a statement of what a business should charge.

Revenue 1,000 and cost 700. Profit is 300. Margin is 300 / 1,000 = 30.00%. Markup is 300 / 700 = 42.857..., shown as 42.86%. Revenue 50 and cost 40. Profit is 10. Margin is 20.00%. Markup is 25.00%. Revenue 80 and cost 100. Profit is −20. Margin is −25.00%. Markup is −20.00%. A negative result is a loss on that pair of numbers. The page does not hide it.

Revenue of 0 leaves margin blank, because the page will not divide by zero. Cost of 0 leaves markup blank for the same reason. Profit can still be computed. Revenue 25 and cost 0 is a profit of 25, a margin of 100.00%, and no markup. Revenue 0 and cost 10 is a profit of −10, no margin, and a markup of −100.00%.

If you want a margin of m, with m written as a fraction, price = cost / (1 − m), as long as m is below 1. A 30% margin is m = 0.30. Cost 70 gives price = 70 / 0.70 = 100. Check it: profit is 30, and 30 / 100 = 30% margin. Markup on that same sale is 30 / 70 = 42.86%, the first example’s rate.

A 30% markup on the same cost is a different price. Price = 70 × 1.30 = 91. Profit is 21. Margin is 21 / 91 = 23.076..., shown as 23.08% if you type 91 and 70 into the calculator. The markup is 30.00%. Quoting “30%” without saying which division you mean is how these two prices get swapped.

The calculator does not add tax, shipping, fees, or a discount. The invoice generator does those as cents on a bill, and it does not read this page’s margin. A percent discount on an invoice is applied to the subtotal after line tax has been calculated, and it does not reduce the tax. That is a billing rule, not a margin formula. If you need a share of a number that is not a price and a cost, the percentage calculator is the general page.

Cost has to mean the cost you intend. If you omit labor or a payment fee, the margin describes a smaller cost than the sale really had. The page cannot know that. It only subtracts the two numbers you type. Nothing is saved.

Write the cost, write the price, subtract, and divide by the price for margin and by the cost for markup. If those two percents match the page, the page did what you asked. If a spreadsheet disagrees, check which denominator the spreadsheet used. A template labeled margin that divides by cost is a markup in disguise.

Use the result to compare two prices you are considering. Do not treat it as a legal or tax conclusion about profit. A filed return and a bookkeeping system have their own definitions of cost.

If the markup rate is k as a fraction, margin = k / (1 + k). A markup near 42.86 percent is about 0.4286. 0.4286 / 1.4286 is about 0.300, the 30 percent margin on revenue 1,000 and cost 700. The page does not run this reverse step. It divides the profit from the two dollar fields. Use the reverse as a check, then type the dollars.

The other direction is markup = margin / (1 − margin), for a margin below 100 percent. A 20 percent margin is 0.20 / 0.80 = 0.25, the 25 percent markup on the 50 and 40 sale. A 100 percent margin would divide by zero, which is the zero-cost case. The page leaves markup blank instead of printing an unbounded number.

Cost 40 and a target margin of 20 percent means price = 40 / 0.80 = 50. Profit is 10. Margin is 20 percent. Markup is 25 percent. Cost 40 and a target markup of 20 percent means price = 40 × 1.20 = 48. Profit is 8. Markup is 20 percent. Margin is 8 / 48 = 16.666..., which the page prints as 16.67 percent for revenue 48 and cost 40. The prices differ by 2 dollars. On a larger cost the same mix-up is a larger gap.

The page formats the division to two decimals. It does not round the dollars to the cent before dividing, because these fields are the numbers you typed, not an invoice ledger. The invoice generator is the page that rounds each money step to the cent, and it does not report margin.

A discount changes the revenue you should type. A 100 price with 10 off is revenue 90 if that is what you collected, and the cost stays put. With cost 70, profit is 20 and margin is 20 / 90 = 22.222..., printed as 22.22 percent. The original 30 percent described the price before the discount. Run the formula on the dollars that remain.

Revenue 80 and cost 100 is a loss of 20. Margin is −20 / 80 = −25 percent. Markup is −20 / 100 = −20 percent. Swapping the boxes flips the story. If a spreadsheet shows 3000 percent, it likely stored 30 in a cell that also multiplies by 100. This page already multiplied by 100, so 30.00 percent means thirty percent.

Cost 20, margin 50 percent: price = 20 / 0.5 = 40. Profit is 20. Markup is 20 / 20 = 100 percent. Cost 20, markup 50 percent: price = 20 × 1.5 = 30. Profit is 10. Margin is 10 / 30 = 33.33 percent when printed to two decimals. Same word, “50 percent,” and the prices are 40 and 30. Write “margin” or “markup” on the price list so the next person does not swap them.

The percentage calculator can take 20 and add 50 percent, which is the markup direction, 30. It does not divide by (1 − 0.5). If you only remember one tool for a target margin, use the profit margin page with the revenue and the cost, after you have computed the price as cost / (1 − margin).