Markup vs. Margin: Key Differences + How To Calculate

Markup and margin both measure profit, but they use different denominators. Markup is the profit expressed as a percentage of a product’s cost. Margin shows profit as a percentage of its selling price. Use both to price products and track profitability, but don’t treat them as interchangeable.

The 2025 Bank of America Business Owner Report found that 88% of business owners are currently affected by inflation, and 64% are raising prices in response. Using the wrong metric can inadvertently lower your margin or push a price too high.

This guide covers what markup and margin mean, how to calculate each, and how to use them effectively in your business.

Markup vs. margin: the key difference

Markup and margin start from the same figure (profit), but get divided by two different numbers to give you two different metrics.

Markup divides profit by cost of goods sold (COGS), the direct cost of making or acquiring a product, including materials, labor, and production overhead. Margin divides that same profit figure by selling price instead.

The table below explains how these two metrics work:

Say a store owner buys a product for $40 and sells it for $50. The profit is $10. So:

• Margin: $10 profit / $50 selling price x 100 = 20%
• Markup: $10 profit / $40 cost x 100 = 25%

The profit figure in these calculations doesn’t change; only the number it’s divided by does.

What is a margin?

Margin is the percentage of a product’s selling price that remains as profit after subtracting its cost.

The margin formula is:

Margin = (Selling price - COGS) / Selling price x 100

A product with a $50 selling price and a $30 cost has a margin of ($50 - $30) / $50 x 100 = 40%.

There are a few different types of margin to keep in mind, each depending on which costs get subtracted:

• Gross margin. Revenue after subtracting COGS, before operating expenses like rent or payroll.
• Operating margin. Revenue after subtracting COGS and operating expenses, before non-operating expenses and taxes.
• Net margin. Revenue after subtracting all business expenses (COGS, operating expenses, non-operating expenses, and taxes). 
• Contribution margin. Revenue after subtracting variable costs only, used to see how much each sale contributes toward covering fixed costs.

When to use margin

Use margin when you want to know how much of a sale is actual profit. This is the number you’ll check when you want to confirm a price will still turn a profit after product costs. It also helps you compare profitability across products or against an industry benchmark.

What is a markup?

Markup is the percentage a store owner adds to a product’s cost, expressed as a percentage of that cost, to set its selling price.

The markup formula is:

Markup = (Selling price - COGS) / COGS x 100

A product that costs $45 to make and sells for $54 has a markup of ($54 - $45) / $45 x 100 = 20%.

When to use markup

Use markup when you need to know how much to add to your base product cost to generate the profit you want. Make sure you’re selling your products at a high enough markup to cover COGS, operating expenses, and still turn a profit.

Why know the difference between margin vs. markup?

If you confuse markup and margin, you’ll misprice your products, which impacts your profit.

Look at this example: Say you want a 40% margin on a product that costs $60 to make. The correct price to charge is $100 ( $60 / (1 - 0.4) = $100), for a $40 profit. However, if you treat that 40% as a markup instead of a margin, you’d be pricing the product at $84 ($60 x (1 + 0.4) = $84). 

With that price, the actual margin comes out to 28.6% ($24 / $84 x 100 = 28.6%), well short of the 40% target. Mixing up these figures (and formulas) would cost you $16 in profit on every unit sold.

That’s an example of how not knowing the difference between the two can lead you to undervalue your products, but it can also lead to overpricing, which can result in fewer sales and lower overall profit.

Shopify shows your projected profit and margin automatically once you enter a cost per item into a product’s Price section in the Shopify admin. This can help you catch a pricing error like the one above before a product goes live. 

Correct use of markup and margin calculations matters most when you’re repricing existing products to manage rising costs, since a markup or margin mixup compounds across every price change you make.

How to calculate margin

Before calculating margin, you need to know your cost and selling price. Once you have them, the calculation is straightforward. Here are the steps: 

1. Find your selling price and cost: Say you’re selling a product for $45 that costs $27 to make.
2. Subtract cost from selling price to find profit: $45 - $27 = $18.
3. Divide profit by the selling price: $18 / $45 = 0.4.
4. Multiply by 100 to get a percentage: Your margin is 40%.

You can run the same formula in reverse to solve for selling price: 

Selling price = Cost / (1 - Target margin)

So a product that costs $30 to make, priced for a 25% margin, sells for $30 / (1 - 0.25) = $40.

Shopify’s profit margin calculator automatically runs calculations for any cost-and-price combination.

How to calculate markup

Calculating markup helps you set your prices. Follow these steps:

1. Find your cost: Say you’re spending $50 in materials and labor to make a rug.
2. Subtract that cost from the selling price to find profit: If you sell said rug for $80, your profit is $80 - $50 = $30.
3. Divide profit by cost: $30 / $50 = 0.6.
4. Multiply by 100 to get a percentage: Your markup is 60%.

To set a price from a target markup instead, solve for selling price: 

Selling price = Cost x (1 + Target markup) 

If you aim for a 50% markup instead, price your rug at $75 $50 x (1 + 0.5) = $75.

Markup vs. margin conversion chart

Because markup and margin are related, in that they’re both measuring profit from two different bases, every markup percentage converts to exactly one margin percentage, and the reverse is also true:

• To convert markup to margin: Margin = Markup / (100 + Markup) x 100. For example, a 60% markup on a $50 product prices it at $50 x 1.6 = $80. The margin works out to 60 / (100 + 60) x 100 = 37.5%. 
• To convert margin to markup: Markup = Margin / (100 - Margin) x 100. For example, a 30% margin on a $70 product gives a markup of 30 / (100 - 30) x 100 = 42.86%. 

Use this table for a quick conversion:

What is a good margin?

A good margin depends on your industry, business model, and how you price your products, but looking at similar businesses can give you a benchmark to check your numbers against.

Margin data compiled by NYU Stern shows that retail businesses selling general merchandise reported an average gross margin of 33.18% as of January 2026. Specialty retailers ran slightly higher, at 35.3%.

A March 2025 Small Business and Entrepreneurship Council survey found that US small businesses selling on Amazon specifically reported a median profit margin of 28.5%, with the most common range being 21% to 30%.

Whatever the benchmark, what matters most is that your margin covers your operating costs and still returns a profit.

What is a good markup?

Average retail markup varies by product and industry, depending on production costs, competition, and operating expenses.

Keystone pricing––doubling a product’s cost––is a common pricing strategy to start with. That’s a 100% markup, which the conversion table above shows works out to a 50% margin. From there, store owners can adjust up or down based on their costs, competitors, and how quickly they need to sell a product.

Using markup and margin in your business

Markup and margin serve two different jobs in a pricing strategy, so it makes sense to look at both. Here are two pricing strategies using these figures:

• Markup pricing (cost-plus pricing). Set a price by adding a fixed percentage to cost. This is the most direct way to guarantee your price covers production costs before it sells.
• Margin-based pricing. Set or evaluate a price based on the percentage of revenue it returns as a profit. This is the number to track once a product is selling, especially when comparing profitability across a catalog.

Shopify calculates both automatically. Entering a cost per item on a product’s Price section displays the projected profit and margin for that product. Shopify’s profit reports track gross margin and gross profit by product, variant, and point-of-sale (POS) location after a sale happens.

In a 2025 Shopify survey, less than half of store owners reported tracking profit margin, traffic, average order value, or conversion rate. But keeping an eye on these metrics can help you understand if your pricing makes sense.

Pricing accuracy affects more than just a single sale. According to Capgemini Research Institute's 2026 consumer research, 74% of consumers worldwide say they would switch brands if a competitor offers a lower regular price. A markup or margin mixup that overprices a product risks losing a sale to a cheaper competitor.