Markup and margin both describe the gap between what something costs you and what you sell it for. They are worked out differently, and treating them as the same thing is one of the most common reasons small businesses earn less than they think.
01The two definitions
Markup is the profit as a percentage of cost.
Markup = (selling price - cost) ÷ cost × 100Margin is the profit as a percentage of the selling price.
Margin = (selling price - cost) ÷ selling price × 100The same sale, two numbers
A Surat saree trader buys a saree for ₹1,000 and sells it for ₹1,250.
- Profit: ₹250
- Markup: ₹250 ÷ ₹1,000 = 25 percent
- Margin: ₹250 ÷ ₹1,250 = 20 percent
The profit is the same ₹250. The markup is 25 percent and the margin is 20 percent. Margin is always lower than markup.
02Why the confusion costs money
Say the trader decides he needs a 25 percent margin to cover rent, staff and interest and still make a profit. If he adds 25 percent to cost, he is setting a 25 percent markup, which is a 20 percent margin. He is five points short on every sale.
On sales of ₹50 lakh a year, the gap between a 20 and 25 percent margin is ₹2,50,000 a year.
The confusion often starts with the language. "I keep 25 percent" can mean either. Your profit and loss statement shows gross profit as a percentage of sales, which is margin. Most owners set prices with markup. The two numbers never line up, and the owner wonders where the money went.
03Converting between them
To get a target margin, divide cost by (1 - margin):
Price = cost ÷ (1 - margin)For a 25 percent margin on a ₹1,000 saree: ₹1,000 ÷ 0.75 = ₹1,333.
To convert:
- Markup = margin ÷ (1 - margin)
- Margin = markup ÷ (1 + markup)
04A conversion table
| Margin you want | Markup to apply on cost | Price on ₹1,000 cost |
|---|---|---|
| 10% | 11.1% | ₹1,111 |
| 15% | 17.6% | ₹1,176 |
| 20% | 25.0% | ₹1,250 |
| 25% | 33.3% | ₹1,333 |
| 30% | 42.9% | ₹1,429 |
| 40% | 66.7% | ₹1,667 |
| 50% | 100.0% | ₹2,000 |
Print it and keep it at the billing counter. Staff who price with markup can then hit the margin you need.
05Where each number shows up
Margin appears in your books. The profit and loss statement shows gross profit, and gross profit divided by sales is your gross margin. Banks look at it when you apply for a loan, and your CA uses it to compare years.
Markup appears at the counter. When a purchase bill comes in and someone writes selling prices on the price list, they usually add a percentage to cost. Supplier schemes are often described the same way, such as "MRP less 30 percent", which is a margin on MRP for the retailer.
Knowing which one a number is avoids most arguments over whether a product "makes 30 percent".
06Which one to use
- Use markup
- for quick pricing from a purchase rate. It is easy to calculate in your head: cost plus 25 percent.
- Use margin
- for planning and comparing, and for talking to your CA or bank, who read your accounts in terms of sales. Your expenses, profit and discounts are all measured against sales, so margin tells you whether the business works.
Many businesses use both: set the target margin, convert it to a markup with the table, and price with the markup.
07Discounts eat margin fast
A discount is taken off the selling price, so it comes straight out of margin.
On the saree sold at ₹1,333 with a 25 percent margin (₹333 profit), a 10 percent discount brings the price down to ₹1,200. Profit falls to ₹200, a 16.7 percent margin. A 10 percent discount has cut profit by 40 percent.
| Discount | New price | Profit | Margin |
|---|---|---|---|
| 0% | ₹1,333 | ₹333 | 25.0% |
| 5% | ₹1,266 | ₹266 | 21.0% |
| 10% | ₹1,200 | ₹200 | 16.7% |
| 15% | ₹1,133 | ₹133 | 11.7% |
Show this to anyone who can give discounts. It changes how freely they give them.
08Margins and GST
Calculate both markup and margin on amounts before GST. If you claim input tax credit, GST on purchases is not your cost, and GST on sales is not your income. An item sold for ₹1,180 including GST at 18 percent has a price of ₹1,000 for margin purposes. GST rates vary by product, and for some goods by value, so check the rate for each item.
09Examples across trades
- A Pune hardware shop
- buys a ball valve at ₹180 and sells it at ₹240. Markup 33.3 percent, margin 25 percent.
- A Jaipur furniture maker
- with a cost of ₹18,000 for a sofa sells it at ₹30,000. Markup 66.7 percent, margin 40 percent.
- A Kolkata distributor
- of FMCG goods buys at ₹92 and sells to retailers at ₹100. Markup 8.7 percent, margin 8 percent.
The distributor's thin margin is normal for the trade. It works because of volume and fast stock turns. The furniture maker needs a high margin because each piece takes time and space, and sales are fewer.
10A quick check for your own business
Take your last month's sales and cost of goods sold from your books. Gross margin is (sales - cost of goods sold) ÷ sales. Then pick ten items you sell often and work out the margin on each from their purchase and selling rates.
If the margin on your common items is well above the business's overall margin, something is leaking: discounts, breakage, theft, or slow stock sold off cheaply. If it is below, your top sellers are underpriced. Either way, you now know where to look.
11For larger businesses
Track margin by product, by customer and by salesperson. A business with a healthy average margin can still lose money on a few large customers who get special rates and long credit. Look at the bottom ten by margin every quarter and decide whether to reprice, reduce service or let them go.
In MatruOS, invoices show the taxable value separately from GST, so the figures you need for margin are on every bill.