Pricing / gross margin

Markup and margin

Convert between cost, selling price, markup on cost and margin on price — and see why a 100% markup is only a 50% margin. The inverse solves the price you need for a target margin.

Gross profit$14,400Revenue$38,400Target profit / unit$16.00

Selling price

$38.40

Cost $24.00 × (1 + 60.0%)

Gross profit per unit

$14.40

Price less cost

Margin on price

37.50%

Gross profit divided by selling price

Price for target margin

$40.00

To achieve a 40.0% margin

Price ladder by markup

Selling price, gross profit and the resulting margin at each markup step.

60.0% markup

Price ladder by markup
Markup on cost	Selling price	Gross profit	Margin on price
20%	$28.80	$4.80	16.7%
30%	$31.20	$7.20	23.1%
40%	$33.60	$9.60	28.6%
50%	$36.00	$12.00	33.3%
60%	$38.40	$14.40	37.5%
80%	$43.20	$19.20	44.4%
100%	$48.00	$24.00	50.0%

A 100% markup is a 50% margin — the two measures are not interchangeable, and conflating them is the classic pricing error.

Cost vs profit in the price

How the selling price splits between cost recovery and gross profit.

Margin as a function of markup

Margin rises quickly at first and then flattens toward 100%.

Canonical equations

The exact relationships implemented by this engine.

P = C(1 + m) · markup m applied to cost

g = (P − C)/P · denominator is price, not cost

g = m / (1 + m) · and m = g / (1 − g)

P = C / (1 − g) · inverts the margin definition

Show model notation and computationOpen the symbolic form, the variable definitions, and the step-by-step derivation when you need the detail.

A clear path from inputs to results.

Markup and margin measure the same profit against different bases, which is why a 100% markup is only a 50% margin. This engine converts between the two, prices a product from cost and markup, and inverts the formula to find the price that delivers a target margin.

Step-by-step methodWorked exampleAssumptions explained

How to use

Enter the unit cost, including landed freight and duties.

Set the markup on cost to get a selling price.

Read the resulting gross margin on price — it will always be lower than the markup.

Set a target margin to solve the price the other way round.

Enter expected volume to scale gross profit.

Use the ladder to see how margin behaves across a range of markups.

The formula

P = C(1+m), \qquad g = \frac{P-C}{P} = \frac{m}{1+m}, \qquad P_{\text{target}} = \frac{C}{1-g}

Reference: Standard retail pricing identity; margin-on-price convention used in gross-margin reporting (Horngren et al., Cost Accounting).

Worked example

$24 cost marked up 60% (default inputs)

Inputs

Unit cost $24.
Markup on cost 60%.
Target margin 40%.
Volume 1,000 units.

Calculation path

1
Selling price: 24 × 1.60 = $38.40.
2
Gross profit: 38.40 − 24 = $14.40.
3
Margin on price: 14.40 / 38.40 = 37.5%.
4
Price for a 40% target margin: 24 / (1 − 0.40) = $40.00.
5
Gross profit at 1,000 units: $14,400.

Result

Price $38.40 · gross profit $14.40 per unit · margin 37.5% · $40.00 needed for a 40% margin.

Interpreting the result

A 60% markup produces a 37.5% margin. The gap widens as the markup rises: 100% markup is 50% margin, 200% is 66.7%, and the margin asymptotically approaches 100% without ever reaching it. Confusing the two is the single most common pricing error in small business, and it usually surfaces as a product that looks profitable per unit and is not.

Assumptions & limitations

Cost is the full landed unit cost, including inbound freight and duty.

Gross margin excludes operating expenses; a 37.5% gross margin can still be a net loss.

A single price applies to all units, with no volume tiers or promotional discounting.

No sales tax or VAT is included in either cost or price.

Markup is calculated on cost, not on selling price — the convention this engine follows throughout.

Frequently asked questions

What is the difference between markup and margin?

Markup divides profit by cost; margin divides profit by price. A $24 cost sold at $38.40 is a 60% markup but a 37.5% margin. Margin is always the smaller of the two for a profitable product.

How do I hit a 40% margin?

Divide cost by (1 − 0.40). A $24 cost needs a $40 price. Multiplying cost by 1.40 would give $33.60, which is only a 28.6% margin — that is the classic mistake.

What margin should a retailer target?

It varies enormously by category: grocery runs 25–35%, apparel 50–60%, software 80%+. Compare against your category, not against a universal benchmark.

Why is a 100% markup only a 50% margin?

Because the profit equals the cost, and the price is twice the cost. Profit over price is therefore one half. The identity is g = m/(1+m).

Does gross margin include shipping?

Outbound shipping is usually an operating expense, not cost of goods, unless you bundle it into the product price. Inbound freight to your warehouse does belong in unit cost.

How do discounts affect margin?

A 10% discount off a 37.5% margin product cuts gross profit by 26.7%, because the discount comes entirely out of profit. This is why discounting is so much more expensive than it looks.