Markup and margin: converting between them
Selling price from markup and its equivalent real margin.
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In short
- What it calculates
- Selling price from markup and its equivalent real margin.
- Formula used
Price = cost × (1 + markup)- Example
- A 60% markup converted into margin:
Markup and margin calculator
Markup and margin get mixed up constantly, and they are not the same. A 60% markup does not give a 60% margin, it gives 37.5%.
Confusing them is one of the most common reasons prices end up too low.
How it works
Markup is calculated on cost; margin is calculated on the selling price. Here we start from the markup to get the price and the equivalent margin.
Formula
Price = cost × (1 + markup)
Margin = (price − cost) ÷ price
Margin = markup ÷ (1 + markup)
Worked example
A 60% markup converted into margin:
Margin = 60 ÷ 160 = 37.5%
Multiplier: 1.60
A cost of £40 would sell at £64.
Explanation
Two numbers for the same transaction
Buying at 60 and selling at 100 leaves 40 of profit. On the cost, that 40 is a 66.7 per cent markup. On the sale, it is a 40 per cent margin. It is exactly the same money described from two viewpoints, and confusing them leaves prices systematically too low.
Why markup always looks larger
Because it is calculated on a smaller base. The higher the margin, the further the two figures diverge: a 50 per cent margin is a 100 per cent markup, and an 80 per cent margin is a 400 per cent markup. At small margins they nearly coincide, which is why the error goes unnoticed until margins grow.
Who uses which
Purchasing and production think in markup, because they start from cost. Management and accounting think in margin, because they look at the income statement. When the two areas speak without clarifying the term, discrepancies appear that look like arithmetic errors but are vocabulary.
Pricing to a target margin
Divide the cost by one minus the desired margin. For a 40 per cent margin on a cost of 60: 60 divided by 0.6 gives 100. Multiplying by 1.4 would give 84 and a real margin of 28.6.
Frequently asked questions
Which should I use when pricing?
Think in markup to build the price from cost, but measure the business in margin: that is what shows up in the profit and loss account.
How do I go from margin to markup?
Markup = margin ÷ (1 − margin). A 50% margin equals a 100% markup.
How do I convert margin to markup?
Divide the margin by one minus the margin. A 40 per cent margin equals a 66.7 per cent markup.
Which should I use for pricing?
Margin, because it reflects your income statement. Work out the price by dividing cost by one minus the target margin.
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