In short: Margin is profit as a percentage of the selling price; markup is profit as a percentage of the cost. If an item costs ₦8,000 and sells for ₦10,000, the profit is ₦2,000, the margin is 20% and the markup is 25%. To get a target margin, divide the cost by (1 − margin): a 30% margin on ₦8,000 needs a price of ₦11,428.57.
Margin vs markup: the difference that costs money
Many business owners add "30%" to their cost and believe they make a 30% margin. They don't:
| Cost | Markup | Price | Profit | Margin |
|---|---|---|---|---|
| ₦10,000 | 30% | ₦13,000 | ₦3,000 | 23.1% |
| ₦10,000 | 42.9% | ₦14,286 | ₦4,286 | 30% |
| ₦10,000 | 100% | ₦20,000 | ₦10,000 | 50% |
A 30% markup is only a 23% margin. If your rent, salaries and other costs need 30% of every sale, pricing with a 30% markup loses money slowly. Read how to price your products: markup vs margin.
The formulas
- Profit = price − cost
- Margin = profit ÷ price × 100
- Markup = profit ÷ cost × 100
- Price for a target margin = cost ÷ (1 − margin)
- Price for a target markup = cost × (1 + markup)
Include every cost of getting the item to the customer: purchase price, transport, packaging, and any platform or POS charges. VAT you collect isn't profit, so work out margins on prices before VAT.
Frequently asked questions
What is a good profit margin for a small business?
It depends on the industry: groceries run on thin margins while services and fashion can carry much higher ones. What matters is that your gross margin covers your running costs with something left over.
How do I calculate margin from cost and selling price?
Subtract cost from price to get profit, divide by the price and multiply by 100.
Is markup the same as margin?
No. Markup divides profit by cost; margin divides it by price. The same profit gives a higher markup than margin.