Profit Margin vs Markup Explained: What Every Business Needs to Know
Understand the critical difference between margin and markup, and learn which to use for pricing, reporting, and profitability analysis.
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Margin and markup are not the same
One of the most common pricing mistakes is confusing profit margin with markup. They both describe profit, but from different perspectives — and using the wrong one can significantly affect your pricing and profitability analysis.
The key difference
| Measure | Formula | Example (£10 cost, £15 sale) |
|---|---|---|
| Markup | (Profit ÷ Cost) × 100 | (£5 ÷ £10) × 100 = 50% |
| Margin | (Profit ÷ Selling Price) × 100 | (£5 ÷ £15) × 100 = 33.3% |
Quick conversion table
| Markup | Margin |
|---|---|
| 25% | 20% |
| 50% | 33.3% |
| 100% | 50% |
| 200% | 66.7% |
When to use each
- Markup — Useful when pricing from cost. If you know your cost and want to set a price, apply a markup percentage.
- Margin — Useful for financial reporting and understanding what share of revenue is profit. Investors and accountants typically talk in margins.
Why fees and VAT matter
If you sell through a marketplace like Amazon, Etsy, or PayPal, transaction fees eat into your margin. A product with a 40% gross margin might have only 25% effective margin after 15% platform fees. Always calculate your margin after all costs and fees.
VAT and profitability
VAT is not your money — it belongs to HMRC. When calculating margins, always use the ex-VAT selling price. Including VAT in your margin calculation will overstate your profitability.
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Use our Profit Margin Calculator to work out your gross margin, effective margin after fees, and break-even price.
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Last updated
Last reviewed: 2026-04-12T11:32:25.479Z.