The Confusion That Costs Money
Many owners set prices with a "30% markup" rule and assume they are keeping 30%. They are not. Markup and margin are different lenses, and mixing them is one of the most common — and quiet — pricing errors in small business.
Definitions
- Markup = how much you add to cost to get price.
Markup % = (Price − Cost) ÷ Cost × 100 - Margin = how much profit you keep on price.
Margin % = (Price − Cost) ÷ Price × 100
Side-by-Side Example
| Cost | Markup | Price | Real Margin |
|---|---|---|---|
| $100 | 50% | $150 | 33% |
| $100 | 100% | $200 | 50% |
| $100 | 25% | $125 | 20% |
Notice the margin is always smaller than the markup. If you tell yourself "I take 50%," but you mean markup, your business actually runs on a 33% margin.
Conversion Formulas
Margin = Markup ÷ (1 + Markup)
Markup = Margin ÷ (1 − Margin)
So a target 40% margin requires a 67% markup. A 50% markup only delivers a 33% margin.
Why Margin Wins
Your financial statements, your profit-margin analysis, and your break-even math all use margin (price-based). If you plan in markup, you will systematically understate your true profitability and may under-price. Decide your target margin first, then derive the price:
Price = Cost ÷ (1 − Target Margin)
For a $100 cost and a target 40% margin: $100 ÷ 0.60 = $166.67.