Margin vs Markup: What's the Difference?
Learn the key difference between margin and markup, how to calculate each, and why confusing them can cost your business money.
Key Takeaways
- Margin is the percentage of the selling price that is profit, while markup is the percentage added to cost to reach the selling price.
- The same transaction yields a lower margin percentage than markup percentage, which is why confusing them leads to underpricing.
- African retailers should master both calculations to set prices that cover costs and generate sustainable profit.
What is margin?
Margin, often called profit margin, is the percentage of the selling price that represents profit. It is calculated by dividing profit by the selling price. For example, if you sell a product for 1,000 Naira that cost you 600 Naira, your profit is 400 Naira and your margin is 40%. Margin always uses the selling price as its base, making it useful for evaluating overall profitability relative to revenue. Investors and lenders typically assess businesses using margin figures.
What is markup?
Markup is the percentage added on top of the cost price to arrive at the selling price. Using the same example, if your cost is 600 Naira and you sell for 1,000 Naira, your markup is 400 divided by 600, which equals approximately 66.7%. Markup uses the cost price as its base. Retailers across Africa commonly use markup when setting shelf prices, because it directly tells them how much to add to their purchase cost from suppliers.
Key differences
The fundamental difference is the denominator: margin divides profit by selling price, while markup divides profit by cost price. A 50% markup does not equal a 50% margin; it actually equals a 33.3% margin. Margin is always lower than markup for the same transaction. Businesses that confuse the two risk setting prices too low, eroding profitability. Financial reports use margin, while day-to-day pricing decisions in wholesale markets often rely on markup.
When to use each
Use markup when setting prices from known costs, which is common for traders purchasing goods from Lagos markets or Kenyan wholesalers. Use margin when analysing business performance, comparing profitability across product lines, or presenting financials to investors. Many successful African SMEs track both: markup for pricing and margin for monitoring. A simple conversion formula connects them, so once you know one, you can always derive the other.