A tradesperson buys materials for $100 and sells the finished job for $150. Is that a 50 per cent margin or a 50 per cent markup? It is a 50 per cent markup and a 33.3 per cent margin, and quoting one when you mean the other is one of the most common ways small businesses quietly underprice their work.
The difference in one line
Both describe the same $50 of profit. They differ only in what that profit is divided by.
- Markup is profit divided by cost: 50 ÷ 100 = 50 per cent.
- Margin is profit divided by selling price: 50 ÷ 150 = 33.3 per cent.
Because the selling price is always larger than the cost, margin is always the smaller of the two percentages. They only ever agree at zero.
Why it costs money
The expensive mistake goes in one particular direction. Someone decides they need a 40 per cent margin, then adds 40 per cent to their costs, which is a 40 per cent markup and only a 28.6 per cent margin. Every job is priced short, and the gap does not show up until the year's figures are added together.
The error is easy to miss because both numbers are honest descriptions of the same transaction. Nothing about "40 per cent" flags which base it refers to, so the two get used interchangeably in conversation and only diverge on the invoice.
Converting between them
The conversion is short in both directions:
- Margin from markup: markup ÷ (1 + markup)
- Markup from margin: margin ÷ (1 − margin)
So a 50 per cent markup is 0.5 ÷ 1.5 = 33.3 per cent margin. Going the other way, a 50 per cent margin needs 0.5 ÷ 0.5 = 100 per cent markup: you have to double your cost to keep half the sale price.
That last figure surprises people, and it is worth sitting with. Half the selling price as profit means the price is twice the cost. The margin and markup calculator converts between the two in either direction.
Which one to use
Use whichever one your industry uses, but be explicit about which it is. Retail and hospitality usually talk in margin, because margin maps directly onto the profit and loss statement, where revenue is the top line. Trades, manufacturing and wholesale often talk in markup, because pricing starts from a known cost and works upward.
The practical habit that avoids the problem entirely: write down the target profit in dollars before converting to any percentage. Dollars are unambiguous. Percentages are not, until you say what they are a percentage of.