Work out gross margin, markup and profit from your cost and selling price — or work backwards from a target margin to the price you need to charge. Margin and markup are not the same number, and confusing them is one of the most expensive mistakes in small business pricing.
Margin and markup are different numbers
This is the single most common pricing error, and it always costs money in the same direction.
- Margin is profit divided by the selling price. Buy at 40, sell at 100, and your margin is 60%.
- Markup is profit divided by the cost. The same transaction is a 150% markup.
Someone who wants a 50% margin but applies a 50% markup ends up at a 33% margin instead. On thin-margin products that difference is the whole business.
Pricing to a target margin
To hit a target margin, divide your cost by one minus that margin as a decimal. For a 60% margin on a cost of 40: 40 divided by 0.4 gives 100. The calculator does this in the target field, so you can set the margin you need and read off the price.
What belongs in “cost”
Gross margin uses the direct cost of producing or acquiring the unit: materials, manufacturing, inbound shipping, packaging, and payment processing fees. It excludes rent, salaries, software and advertising — those come out of the gross profit afterwards.
A healthy gross margin is not the same as a profitable business. If your gross margin is 60% but marketing and overheads consume more than that, you still lose money. Gross margin tells you how much room you have to work with, not whether you are winning.