Margin vs markup: the pricing mistake that shrinks profit

They use different starting points

Markup measures profit against cost. Margin measures profit against selling price. That difference means a 50% markup does not produce a 50% margin.

If an item costs 60 and sells for 90, profit is 30. The markup is 30 divided by 60, or 50%. The margin is 30 divided by 90, or 33.3%.

Price from the target margin

When the commercial goal is a target gross margin, work backwards from total unit cost rather than adding the same markup to every product. The price before percentage fees is cost divided by one minus the target margin rate.

If total unit cost is 60 and the target margin is 40%, the required price is 60 divided by 0.60, which is 100. Adding a 40% markup would produce only 84 and a margin of about 28.6%, well below the target.

• Include direct product or delivery cost.
• Allow for payment fees and per-sale overhead.
• Check tax treatment before comparing the final selling price.
• Stress-test discounts so promotions do not erase the intended margin.

Build a complete unit cost

Start with the product, labour or subcontractor cost caused by one sale. Then add fulfilment, packaging, delivery subsidy, payment charges and any per-sale support or platform fee. Keep fixed overhead separate when using a contribution or break-even calculation.

Use one consistent tax basis. A VAT-registered UK business commonly models recoverable amounts net of VAT, while a customer-facing price may need to be assessed including VAT. In the US, sales tax generally needs separate treatment from business revenue.

Test the realised price, not only the list price

Discounts, returns, commissions and payment fees can reduce the amount retained from a sale. Recalculate margin using the expected realised price and run a promotion case before approving a discount. A list price that meets the target is not enough if most customers pay less.

Compare products on both margin percentage and contribution amount. A lower-percentage product can contribute more cash per sale, while a high percentage on a very small price may not cover fixed costs at realistic volume.

Use the result in a pricing decision

Set a floor price under the stated assumptions, a normal customer price and a review trigger for supplier-cost or fee changes. Record which costs and period were used so the calculation can be repeated rather than reconstructed from memory.

The Profit Margin Calculator shows margin and markup together. Use the Target Pricing Calculator when you need to work backwards from a required margin, then use the Break-even Calculator to test whether expected sales volume covers fixed costs.