Profit Margin vs Markup: A UK Business Owner's Explainer

Two businesses sell the same item for the same £60. One owner says they make 50% on it, the other insists it's 100%. Both are right — they're describing different things. Margin and markup are two ways of measuring the gap between what something costs you and what you sell it for, and mixing them up is one of the most common and most expensive arithmetic slips in small business. It creeps into pricing, discounting, sales targets and the way you read your own accounts. Here's the difference, with numbers you can check on the back of an envelope.

The difference in one line

Markup measures profit against cost. Margin measures profit against selling price. The profit figure is identical in both cases — only the denominator changes. That single swap is enough to make the two percentages look wildly different for the same sale, which is exactly why so many pricing conversations go sideways.

The two formulas

• Markup % = (selling price − cost) ÷ cost × 100
• Margin % = (selling price − cost) ÷ selling price × 100
• Gross profit = selling price − cost (the same number in both sums)

Because the denominator shifts, markup is always the larger of the two figures for any given sale. A 100% markup is a 50% margin. A 50% markup is a 33.3% margin. There's a useful sanity check buried in this: margin can never reach 100%, however steep your price, because cost never disappears. Markup has no ceiling at all. Buy at £1, sell at £10, and you've made 900% markup on a 90% margin.

Worked examples with UK numbers

A product business

A small coffee roaster sells a 250g bag for £12. Beans, bag and label come to £4.50. Profit is £7.50. Markup is 7.50 ÷ 4.50 = 166.7%. Margin is 7.50 ÷ 12 = 62.5%. Both numbers describe the same bag. If the roaster told a retailer "I run at 166%", the retailer would assume a margin far healthier than reality.

A service business

A freelance web designer charges £900 for a project. Subcontractor fees and software licences cost £600, so profit is £300. Markup is 300 ÷ 600 = 50%. Margin is 300 ÷ 900 = 33.3%. Quote the first figure to a client and it sounds like a healthy business; quote the second to a lender and it's a tighter picture.

Both measures earn their keep, but they do different jobs. Markup is a pricing tool: it's how you build a price from a known cost. Margin is a performance measure: it tells you what share of every pound of sales stays with the business after direct costs.

Watch the VAT line

If you're VAT-registered, the number on the invoice isn't all yours. At 20% VAT, a £60 invoice carries £10 of VAT and leaves £50 of net sales. If the item cost you £30, your gross profit is £20 — a 40% gross margin, not the 50% the ex-VAT sum suggests.

Calculate margins on net figures throughout: costs excluding recoverable VAT, selling prices excluding VAT. Mixing a VAT-inclusive price with an ex-VAT cost is the easiest way to flatter your numbers without realising it. VAT rules have plenty of exceptions, so if your sales mix includes zero-rated or reduced-rate items, run it past your accountant rather than guessing.

Where the confusion costs real money

• Discounting. Knock 10% off a £60 item costing £30 and you sell at £54 with £24 profit — a 44.4% margin, not 50%. To recover the lost gross profit you'd need to sell roughly a quarter more units. Discounts are far more expensive than they look when you think in markup.
• Commission and bonus schemes. If a salesperson is paid on "margin" but the target was set using "markup" thinking, everyone ends up disappointed.
• Cost rises. When a supplier puts prices up, a fixed selling price erodes margin and markup at different rates. Only tracking one hides part of the damage.
• Funding conversations. Banks and investors generally mean gross margin. Quoting markup in that room overstates the business, and it tends to get noticed.

Converting between them, and pricing to a target

Two formulas cover most everyday needs:

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

Say you want a 60% gross margin on something that costs you £30. Do 30 ÷ 0.4 and you get £75. Selling at £60 gives you 50% margin instead — a £15 gap per unit that adds up fast across a year. If the market won't bear £75, you now know precisely what you're giving away rather than discovering it at year end. For a 40% target, the price is 30 ÷ 0.6 = £50, which is a 66.7% markup.

Keeping the two straight

1. Label every percentage. Write "50% margin" or "100% markup" — never a bare "50%" on a price list or in a team chat.
2. Use markup for costing, margin for reporting. One builds prices; the other tells you how the business performed.
3. Rebuild your price list from target margins. For each line, note cost, target margin and the resulting price. It takes an afternoon and settles years of drift.
4. Review the bottom of the list each quarter. The lines with the thinnest margins are usually the ones eating your time.

Putting it to work this week

Pick your five best-selling products or services and calculate both figures for each. You'll almost certainly find one or two that are less profitable than you assumed, and at least one where a modest price rise would be painless. Check how your bookkeeping software reports profitability — most default to margin — and make sure you and your accountant are speaking the same language before you act on either number.

If you're VAT-registered, redo the sums on net figures. If pricing decisions carry real weight — a big contract, a distributor agreement, a change to your standard rates — it's worth a short conversation with an accountant before you commit, particularly where VAT, corporation tax or mixed-rate sales are involved.

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