Margin vs markup: the mix-up that quietly shrinks your profit

Two numbers, both expressed as percentages, both describing the same profit, and regularly confused. Margin and markup look interchangeable in conversation, but they’re calculated on different bases, and mixing them up is one of the most common reasons small businesses price too low without realising.

What’s the difference between margin and markup?

Both start with the same dollar figure: selling price minus cost. What changes is what you divide it by.

• Markup divides the profit by the cost. It answers “how much did I add on top of what I paid?”
• Margin divides the profit by the selling price. It answers “what share of each sale do I keep?”

Illustrative example. A Dunedin bike shop buys a helmet for $80 excluding GST and sells it for $120 excluding GST. Profit is $40.

• Markup: $40 ÷ $80 = 50%
• Margin: $40 ÷ $120 = 33.3%

Same helmet, same profit, two very different-looking percentages.

How do you convert between the two?

Markup	Margin
20%	16.7%
25%	20.0%
33.3%	25.0%
43%	30.0%
50%	33.3%
67%	40.0%
100%	50.0%
150%	60.0%

The formulas:

• Margin = markup ÷ (1 + markup)
• Markup = margin ÷ (1 − margin)
• Price needed for a target margin = cost ÷ (1 − margin)

That last one is the most useful for pricing. If a product costs $60 and you want a 35% margin, the price is $60 ÷ 0.65 = $92.31 excluding GST.

How does the mix-up lead to underpricing?

The classic error goes like this: the business plan or the accountant says the business needs a 40% gross margin to cover overheads and make a profit. The owner, pricing stock, adds 40% to cost.

Illustrative example. A Wellington gift shop buys a candle for $25 excluding GST. Adding 40% gives a price of $35. The margin is $10 ÷ $35 = 28.6%, not 40%. To get a 40% margin, the price needs to be $25 ÷ 0.60 = $41.67.

Across a whole range, that gap is the difference between a business that covers its overheads and one that doesn’t. If a shop turning over $600,000 a year excluding GST thinks it’s making 40% but is actually making 28.6%, it’s about $68,000 short of where it thought it was.

Which measure should you use?

Either, consistently. Many retailers and wholesalers price stock using a markup because it’s quick to apply to a cost. Financial reports, benchmarks and lenders almost always talk about gross margin. The safest approach:

• Decide your target in margin terms, because that’s how your profit and loss shows it.
• Convert to the markup your team uses at the till or in the pricing system.
• Write both on the pricing sheet so nobody confuses them.

Where does GST come in?

Always calculate margin and markup excluding GST. GST collected on sales belongs to Inland Revenue, and GST on purchases is claimed back, so neither belongs in your profit. If a supplier’s invoice shows a GST-inclusive cost and you add your markup to that, then add GST again on the selling price, you’ve charged GST on GST. Our page on GST-inclusive pricing covers the presentation side.

How does margin connect to the rest of your numbers?

Gross margin is the engine of the whole business. It pays overheads; what’s left is profit. That’s why:

• Your break-even point is overheads divided by gross margin percentage.
• A price rise lifts margin without changing costs, which is why small rises have big effects.
• Discounts cut margin directly. A 10% discount on a product with a 30% margin removes a third of the profit on that sale.

The price-rise calculator shows how changes in price move your gross margin and how many sales you could lose and still be ahead.

How do discounts look in margin terms?

Discounts are where the margin-markup confusion does the most damage, because a discount comes straight off the price while costs stay the same. On a product with a 40% margin, a 10% discount removes a quarter of the gross profit on that sale; a 20% discount removes half. To earn the same total gross profit after a 20% discount, you’d need to sell twice as many units.

Margin before discount	10% discount: extra sales needed to stand still	20% discount: extra sales needed
30%	50%	200%
40%	33%	100%
50%	25%	67%

Illustrative. Assumes costs per unit don’t change.

Before running a sale, check the table for your margin. Promotions can be worth it to clear dead stock or win new customers, but rarely for volume alone.

How do you check your margins are what you think?

Pull a gross margin report by product category or job type from your accounting or point-of-sale system. Compare actual margin with the target. Common culprits when they differ: supplier price rises not passed on, freight not included in cost, heavy discounting, stock shrinkage and quotes that underestimated labour. Our monthly numbers check makes gross margin one of the five figures to review every month.

When healthy margins meet a growth plan

Once margins are where they should be, a business can fund more of its own growth and borrow with confidence for the rest. If you’re at that point, it’s worth knowing what funding could look like before you need it; you can check your options in about a minute.

Margin first, then momentum

We look at unsecured options for trading businesses, sized on turnover and bank statements, and loans secured on residential or commercial property. There’s no credit check when you first enquire, your enquiry isn’t sold or passed to other lenders, and a real person on our New Zealand team reads it. The more accurately you answer, the more useful our first call. See if you qualify.