Margin vs markup: what is the difference?

You buy a candle for £4 and sell it for £10. Is that a 60% profit or a 150% profit? Both — it depends whether you are talking about margin or markup. Mixing the two up is one of the most common ways small businesses underprice.

The formulas

Margin = (price − cost) ÷ price × 100

Markup = (price − cost) ÷ cost × 100

The profit on top is the same £6. Margin compares it to the £10 price: 60%. Markup compares it to the £4 cost: 150%.

Converting between them

To go from a margin you want to the price you need:

Price = cost ÷ (1 − margin)

For a 70% margin on a £2.10 dish: £2.10 ÷ 0.30 = £7.00 before VAT.

Why it matters

Say you want a 50% margin and you "add 50%" to a £10 cost. You charge £15 and earn a 33% margin, not 50%. On a whole menu or a rail of stock, that gap is the difference between profit and a busy month that pays nothing.

Common mistakes

1. Adding a markup when you meant a margin. Decide which one your target is, and use the formula for it.
2. Forgetting VAT. Both formulas use the price before VAT. Add VAT after you have set the price you need.
3. Using one markup for everything. A £1 cost and a £20 cost rarely deserve the same multiplier.

In DUMA

DUMA shows the cost and margin of every product with a recipe, worked out from its ingredients, with VAT taken out of the selling price when you are VAT-registered — so you set prices against the money you keep. More in gross profit margin.