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You buy a product for ₹600 and want a 40% margin. So you add 40% to the cost and sell it for ₹840. Congratulations — you’ve just set a 28.6% margin. This mix-up between margin and markup is one of the most common (and expensive) pricing mistakes in small business.
The two definitions
Markup = (Price − Cost) ÷ Cost × 100
Margin = (Price − Cost) ÷ Price × 100
The profit is the same; only the base is different. Markup compares profit with what you paid; margin compares it with what the customer paid.
Cost ₹600, price ₹1,000, profit ₹400:
Markup = 400 ÷ 600 = 66.7%
Margin = 400 ÷ 1,000 = 40%
Because the price is always bigger than the cost (if you’re profitable), margin is always lower than markup for the same product.
Conversion table
| Markup | Equals margin |
|---|---|
| 20% | 16.7% |
| 25% | 20% |
| 33.3% | 25% |
| 50% | 33.3% |
| 100% | 50% |
| Target margin | Required markup |
|---|---|
| 20% | 25% |
| 30% | 42.9% |
| 40% | 66.7% |
| 50% | 100% |
The formulas:
Margin = Markup ÷ (100 + Markup) × 100
Markup = Margin ÷ (100 − Margin) × 100
Pricing for a target margin
To get the price that gives a specific margin:
Price = Cost ÷ (1 − Target margin)
Cost ₹600, target margin 40%: Price = 600 ÷ 0.60 = ₹1,000.
Check: profit ₹400 ÷ ₹1,000 = 40% ✓
Why the mistake hurts
Suppose your business needs a 40% gross margin to cover rent, salaries and other expenses and still make a profit. If you price everything at “cost + 40%”, your real margin is only 28.6%. On ₹50 lakh of annual sales, that’s the difference between ₹20 lakh and about ₹14.3 lakh of gross profit — over ₹5.7 lakh missing, often without anyone noticing until year-end.
Gross margin vs net margin
- Gross margin = (Revenue − Cost of goods) ÷ Revenue. It shows how profitable your products are.
- Net margin = Net profit after all expenses ÷ Revenue. It shows how profitable your business is.
A shop might have a 35% gross margin but only a 6% net margin after rent, staff, electricity, marketing and taxes. Know both numbers.
Discounts eat margin faster than you think
If your margin is 25% and you give a 10% discount, you don’t lose a tenth of your profit — you lose 40% of it:
- Price ₹1,000, cost ₹750, profit ₹250.
- 10% discount → price ₹900, profit ₹150.
That’s why businesses with thin margins must be careful with discounts and offers.
Practical tips
- Decide prices from margin targets, then convert to the markup your team uses.
- Exclude GST from both cost and price in margin calculations.
- Include all direct costs — freight, packaging and payment gateway fees — in the cost.
- Review margins by product — a few low-margin best-sellers can drag the whole business down.
Calculate both instantly
Our Profit Margin Calculator shows profit, margin and markup from your cost and selling price — and works backwards to tell you the selling price needed for any target margin.
Free toolTry the Profit Margin CalculatorWork out profit, margin and markup — or the price you need to charge.Frequently asked questions
Which is better to use, margin or markup?
Both are useful. Markup is convenient for setting prices from cost; margin is what you'll see in financial statements and use to compare profitability. Just never mix them up.
Should I include GST in margin calculations?
No. Use prices and costs excluding GST, because GST collected is passed on to the government and isn't your income.
What's the difference between gross and net margin?
Gross margin uses only the direct cost of the product. Net margin subtracts all expenses — rent, salaries, marketing, interest and tax — and is always lower.
Written by the Toolsopedia team. Spotted an error? Tell us and we’ll fix it.