Margin is not markup, and the difference is your profit

Two words that get used as if they mean the same thing, describing the same money, giving different numbers. Confusing them does not produce an error message. It produces prices that are quietly too low, on every unit, for as long as nobody checks.

The two definitions

Margin is profit as a share of the selling price. Markup is profit as a share of the cost. That is the whole difference, and it is enough to change a price by 20%.

Buy at 40, sell at 60. Profit is 20. As a share of the 60 you charged, that is a 33.3% margin. As a share of the 40 you paid, it is a 50% markup. Same transaction, same 20 in profit, two numbers that look nothing alike.

Margin is what the accountant means. Markup is what the supplier means. They are almost never talking about the same figure.

The formula that costs money

To price from a target margin: cost ÷ (1 − margin). For a 40% margin on a cost of 40, that is 40 ÷ 0.6 = 66.67.

The mistake is multiplying instead: 40 × 1.4 = 56. That is the markup formula, and it feels right because the arithmetic is easier. At 56 the actual margin is 28.6%, not the 40% intended. On a thousand units that is over ten thousand in profit that was budgeted for and never arrived.

• Price from margin: cost ÷ (1 − margin)
• Price from markup: cost × (1 + markup)
• Margin from price: (price − cost) ÷ price
• Markup from price: (price − cost) ÷ cost

Why margin cannot reach 100%

Margin is a share of the price, so a 100% margin would mean the cost is zero — or the price is infinite. Any calculator that returns a number when you ask for a 100% margin is dividing by zero and dressing up the result. Markup has no such ceiling: a 400% markup is ordinary in hospitality and normal in software.

Where tax sits

After all of it, and outside all of it. VAT and sales tax change what the customer pays and not what you make — you are collecting it, not earning it. Folding tax into a margin calculation makes the margin look better than it is, which is the same mistake in a different coat.

The one to write on the wall

Pick margin and stick to it. It is the number that connects to everything else you care about: gross margin drives break-even, break-even drives runway, and runway is how long you have. Markup is a pricing mechanic. Margin is the business.