Margin and markup are built from the same two numbers — what a product costs and what it sells for — and they describe the same profit. They differ only in what they divide by. That single difference is responsible for a remarkable amount of quiet, structural underpricing.
The failure mode is specific and common: a business decides it wants a 40% margin, applies 40% to cost, and ends up with a 28.6% margin. It then spends a year wondering why the gross profit line does not match the plan.
The two formulas
Both start from the same gross profit — selling price minus cost of goods.
Markup % = (price - cost) / cost x 100
Margin % = (price - cost) / price x 100
A product costing EUR 10 and selling for EUR 15 earns EUR 5. As a share of the EUR 10 cost that is a 50% markup. As a share of the EUR 15 price it is a 33.3% margin. Same five euros, two different sentences, and only one of them connects to your profit and loss statement — margin, because the P&L divides everything by revenue.
Use markup to set prices, margin to judge them. Markup is the operation you perform on a cost. Margin is the number that shows up in your accounts and the one every benchmark is quoted in. Confusing the two is what breaks the link between the pricing spreadsheet and the year-end.
Converting between them
The conversions are one line each:
Margin = markup / (1 + markup) | Markup = margin / (1 - margin)
| Markup | Equivalent margin | Price multiplier on cost |
|---|---|---|
| 20% | 16.7% | 1.20x |
| 25% | 20.0% | 1.25x |
| 33% | 24.8% | 1.33x |
| 50% | 33.3% | 1.50x |
| 67% | 40.1% | 1.67x |
| 100% | 50.0% | 2.00x |
| 150% | 60.0% | 2.50x |
| 233% | 70.0% | 3.33x |
The gap widens as the numbers grow. At 20% the two measures are 3.3 points apart and the error is survivable. At 100% they are 50 points apart. Businesses selling higher-margin products have more to lose from the confusion, not less.
Pricing backwards from a target margin
This is the calculation people get wrong most often. To hit a target margin you divide by one minus the margin. You do not multiply by one plus it.
Price = cost / (1 - target margin)
Taking a EUR 12 cost and a 45% target:
- Correct: 12 / (1 - 0.45) = 12 / 0.55 = EUR 21.82 — margin 45.0%
- Wrong: 12 x 1.45 = EUR 17.40 — margin 31.0%
The wrong version leaves EUR 4.42 per unit on the table, or 31% less gross profit than intended. At 8,000 units a year that is a EUR 35,000 hole, and it will not be visible anywhere except a margin percentage that never quite matches the plan.
Why discounts hurt more than they look
A discount comes entirely out of gross profit, because cost does not move. This makes the proportional damage far larger than the headline percentage suggests.
Take a product costing EUR 10, listed at EUR 20 — a 50% margin, EUR 10 of gross profit:
| Discount | Net price | Gross profit | New margin | Profit lost |
|---|---|---|---|---|
| 0% | EUR 20.00 | EUR 10.00 | 50.0% | — |
| 10% | EUR 18.00 | EUR 8.00 | 44.4% | 20% |
| 20% | EUR 16.00 | EUR 6.00 | 37.5% | 40% |
| 30% | EUR 14.00 | EUR 4.00 | 28.6% | 60% |
| 40% | EUR 12.00 | EUR 2.00 | 16.7% | 80% |
A 20% discount destroys 40% of the profit on every unit sold. To stand still you would need to sell 67% more units, which also means 67% more materials, more labour, and more of everything else that scales.
Extra volume needed to break even = original margin / (original margin - discount) - 1
On a 50% margin, a 20% discount needs +67% volume. On a 35% margin, the same discount needs +133%. On a 25% margin it is mathematically impossible — a 20% discount would leave 5 points of margin, and no realistic volume increase recovers it. This is the number to run before agreeing to a promotion, not after.
Gross margin is not contribution margin
Gross margin uses cost of goods only. It is the right measure for comparing products on a like-for-like basis, but it is not what a sale actually contributes, because several real costs sit outside cost of goods and vary directly with each order:
- Marketplace and platform commission, typically 5-15%
- Payment processing, typically 1.4-2.9% plus a fixed fee
- Outbound shipping and packaging not billed to the customer
- Expected returns and refunds
Contribution margin = (price - COGS - variable selling costs) / price
A product with a healthy 45% gross margin sold through a marketplace at 12% commission, with 1.9% processing and EUR 3.20 of unbilled shipping on a EUR 28 order, contributes closer to 20%. Same product, same cost, entirely different business. Channel-specific contribution margin is the number that should drive where you push volume, and it is why wholesale and retail prices need to be set from one cost base rather than negotiated independently.
A worked example
A ceramics studio makes a mug at a true cost of EUR 6.40 — established properly, with labour, overhead, and yield included, not just clay and glaze.
- Direct retail: target 55% margin. Price = 6.40 / 0.45 = EUR 14.22, rounded to EUR 14.50. Actual margin 55.9%.
- Marketplace: same EUR 14.50 list, less 12% commission and 1.9% processing = EUR 12.48 net. Contribution margin 48.7%.
- Wholesale: stockist expects 50% off retail = EUR 7.25. Against a EUR 6.40 cost that is an 11.7% margin — almost certainly a loss once any selling cost is added.
The wholesale line is the finding. It is not solved by negotiating harder; it is solved by recognising that a product designed for a 50% retail margin cannot also carry a 50% trade discount, and either the cost base or the retail price has to change before wholesale is viable.
Rules that keep you out of trouble
- State every internal target as a margin, and convert to markup only at the moment you calculate a price.
- Price with cost / (1 - margin). Never multiply cost by one plus the margin.
- Run the break-even volume calculation before approving any discount above 10%.
- Track contribution margin per channel, not just gross margin per product.
- Re-derive prices when costs move, rather than holding a price and watching margin erode silently.
Margin discipline is not about charging more. It is about knowing which of your products and channels actually pay for the business, so that growth makes you money instead of making you busy.