Margin vs markup: the difference, the formulas and a conversion table

Margin and markup both describe profit as a percentage, and people use them as if they were the same thing. They are not. Mixing them up is one of the most common ways small businesses underprice their work.

The difference in one line

• Margin is profit as a share of the selling price.
• Markup is profit as a share of the cost.

Same profit, different base. Because the price is always bigger than the cost, the margin is always smaller than the markup.

The formulas

Profit = selling price − cost

Margin = profit ÷ selling price × 100

Markup = profit ÷ cost × 100

A worked example

A project costs you ₹60,000 to deliver, counting your team's time and any outside costs. You charge the client ₹1,00,000.

• Profit: ₹1,00,000 − ₹60,000 = ₹40,000
• Margin: ₹40,000 ÷ ₹1,00,000 = 40%
• Markup: ₹40,000 ÷ ₹60,000 = 66.67%

One project, one profit, two very different percentages. Both are correct. They answer different questions.

Converting between the two

You can turn one into the other without knowing the prices:

Margin = markup ÷ (1 + markup)

Markup = margin ÷ (1 − margin)

Use decimals in these formulas, so 40% is 0.40. Here are the pairs that come up most:

A 100% markup, doubling your cost, gives a 50% margin. That surprises a lot of people.

The mistake that costs money

Say you want a 40% margin on that ₹60,000 project, and you add 40% to the cost:

₹60,000 × 1.40 = ₹84,000

Your profit is ₹24,000, which is a margin of 28.6%, not 40%. You meant to make ₹40,000 and made ₹24,000. On a year of projects, that gap is the difference between a healthy business and a stressful one.

The fix is to price from the margin directly.

Pricing from a target margin

Price = cost ÷ (1 − target margin)

For a 40% margin on ₹60,000 of cost: ₹60,000 ÷ 0.60 = ₹1,00,000.

For a 45% margin: ₹60,000 ÷ 0.55 = ₹1,09,091.

The margin calculator does this for you: enter the cost and the margin you want, and it gives the price. The project cost estimator uses the same method when it adds your profit margin to a quote.

Which one should you use?

• Use margin to judge how healthy the business is, to compare projects and to set targets. Your accountant, your bank and most financial reports talk in margins, because margin tells you how much of every rupee or dollar of revenue you keep.
• Use markup when you resell something at a set uplift on its cost, such as hosting, software licences or printing passed through to a client. "Cost plus 20%" is a markup.

What matters most is that everyone in the business means the same thing. If a team member says "we're at 30%", ask which one.

What counts as cost for a service business

For agencies and freelancers, the cost of a project is mostly time. To get a true margin, count:

• Team time at what each person costs you per hour, not what you bill them at. For an employee, that is salary plus benefits divided by the hours they actually work.
• Freelancers and contractors you bring in for the project.
• Direct costs such as stock photos, fonts, plugins, ads spend you manage on the client's behalf, or travel.

Overheads like rent and your own software can be counted per project as a percentage, or kept separate. If you leave them out of project costs, aim for a project margin high enough to cover them.

Margin, markup and GST

Work out margin and markup on amounts before GST. The GST you charge a client is collected for the government, not earned, so including it would make your margin look bigger than it is. Our guide on GST for freelancers explains how GST works on services.