Margin vs markup: why 25% markup is only 20% margin
Margin and markup use the same two numbers, the cost and the selling price, but they measure different things. Mix them up and you can price a product for a 25% margin and actually earn 20%. Over a year of sales, that gap is real money.
The two formulas
Profit = selling price − cost
Markup % = profit ÷ cost × 100
Margin % = profit ÷ selling price × 100
Markup asks: how much did I add on top of what I paid? Margin asks: how much of what the customer paid do I keep?
Example: you buy a shirt at ₹80 and sell it at ₹100. Your profit is ₹20.
- Markup = 20 ÷ 80 = 25%
- Margin = 20 ÷ 100 = 20%
Margin is always the smaller number. It can never reach 100%, because that would mean the goods cost you nothing. Markup has no such limit.
Quick conversion
| Markup | Margin | Cost ₹100 sells at |
|---|---|---|
| 10% | 9.1% | ₹110 |
| 25% | 20% | ₹125 |
| 50% | 33.3% | ₹150 |
| 100% | 50% | ₹200 |
Setting a price for the margin you want
This is where the mistake happens. If you want a 30% margin on something that costs ₹700, adding 30% gives ₹910, and your margin is only 23%.
Instead, divide the cost by what's left of the price after your margin:
Selling price = cost ÷ (1 − margin ÷ 100)
₹700 ÷ (1 − 0.30) = ₹700 ÷ 0.70 = ₹1,000. Check it: the profit is ₹300, and 300 ÷ 1,000 is exactly 30%. As a markup, that's about 42.9%.
What a discount really costs
A discount comes straight out of your profit, while your cost stays the same. Take a product you sell at ₹100 that cost you ₹80:
| Discount | You sell at | Profit | Margin |
|---|---|---|---|
| None | ₹100 | ₹20 | 20% |
| 5% | ₹95 | ₹15 | 15.8% |
| 10% | ₹90 | ₹10 | 11.1% |
| 20% | ₹80 | ₹0 | 0% |
A 10% discount has cut your profit in half. To earn the same ₹200 you made from selling 10 pieces at full price, you now have to sell 20 pieces at the discounted price. It's worth doing this sum before a festival sale, not after.
Three things to keep out of the calculation
- GST: if you can claim input tax credit, GST is not your money. Work out margin on prices before GST, or your margin will look bigger than it is.
- All your costs: "cost" should include freight, packing and any platform commission, not only the purchase price.
- Gross versus net: this margin is before rent, salaries and electricity. A 30% gross margin can still mean a loss if those overheads are more than 30% of sales.
The examples are arithmetic for illustration. For decisions about your own pricing and tax, your accountant can look at the full picture.