Profit margin and markup are two numbers that sellers often use when pricing products. They sound similar, and both are expressed as percentages, but they measure different things.
Confusing the two can lead to a product being priced lower than you intended, especially once marketplace fees, payment fees, advertising and other selling costs are included.
This guide explains profit margin vs. markup in plain language, with simple examples you can apply to your own products.
What is profit margin?
Profit margin tells you how much of your selling price remains as profit after your costs are deducted.
For example, imagine you sell a product for $20 and your total cost is $12.
Your profit is:
$20 − $12 = $8
Your profit margin is calculated using your selling price:
Profit Margin = Profit ÷ Selling Price × 100
In this example:
$8 ÷ $20 × 100 = 40%
Your profit margin is therefore 40%.
In simple terms, for every $20 of sales revenue, $8 is profit based on the costs included in this example.
What is markup?
Markup looks at the same profit from a different direction. Instead of comparing profit with your selling price, markup compares profit with your cost.
Using the same example:
Cost = $12
Selling price = $20
Profit = $8
The markup formula is:
Markup = Profit ÷ Cost × 100
So:
$8 ÷ $12 × 100 = 66.7%
The product has a 40% profit margin but a 66.7% markup.
Nothing about the sale has changed. The percentages are different because margin and markup compare the profit against different numbers.
Profit margin vs. markup: a simple example
Suppose a product costs you $50 and you add a 50% markup.
A 50% markup adds $25 to the cost:
$50 + $25 = $75 selling price
Your profit is $25, but that does not mean you have a 50% profit margin.
Your margin is:
$25 ÷ $75 × 100 = 33.3%
So a 50% markup produces a 33.3% margin in this example.
This is one of the most common reasons sellers accidentally price below the margin they intended.
Why are profit margin and markup different?
The difference comes down to what each percentage is based on.
- Markup compares your profit with your cost.
- Profit margin compares your profit with your selling price.
Because the formulas use different starting numbers, the percentages are not interchangeable.
If someone says, “I want to make 30% on this product,” it is therefore important to know whether they mean a 30% markup or a 30% profit margin.
Why this matters even more for online sellers
For ecommerce and marketplace sellers, product cost is rarely the only cost involved in a sale.
Depending on where and how you sell, your costs may include:
- Product or material cost
- Packaging
- Shipping paid by the seller
- Marketplace commission
- Payment or transaction fees
- Affiliate commission
- Advertising cost
- Seller-funded discounts or vouchers
- Other costs associated with fulfilling the order
Some of these costs are fixed amounts, while others are calculated as a percentage of the selling price.
This matters because simply adding your desired profit percentage to your product cost may not produce the profit margin you expect.
A simple marketplace example
Imagine your product and other fixed costs total $20.
If you decide to add 30% to those costs, you might calculate:
$20 × 1.30 = $26
But if your marketplace and payment fees are calculated as percentages of the $26 selling price, those fees still need to come out of the sale.
Your actual profit will therefore be lower than the simple cost-plus calculation suggests.
This is why pricing for a target margin often requires working backwards from the margin you want while accounting for percentage-based selling fees.
How to price for a target profit margin
If your goal is a specific profit margin, start by identifying the costs that apply to each sale.
Separate them into two groups:
Fixed costs per sale
These are costs that can usually be expressed as a fixed amount, such as product cost, packaging, seller-paid shipping and advertising cost per order.
Percentage-based costs
These may include marketplace commission, payment fees and affiliate commission.
Once these costs are included, you can work backwards to find the selling price required to achieve your chosen margin.
If you don't want to calculate this manually, use the Selling Price Calculator. Enter your costs, percentage-based fees and target margin, and the calculator will estimate the selling price required.
If you are building a product price from materials, labour and other costs, the Product Pricing Calculator may be more useful.
Profit margin and markup formulas
Here are the two formulas for quick reference.
Profit margin
Profit Margin (%) = (Selling Price − Total Costs) ÷ Selling Price × 100
Markup
Markup (%) = (Selling Price − Total Costs) ÷ Total Costs × 100
The important difference is the denominator: margin uses the selling price, while markup uses the cost.
What about discounts?
Discounts can change your profit margin quickly because your selling price falls while many of your costs remain the same.
For example, if packaging and product costs remain unchanged during a promotion, a 20% discount does not necessarily mean your profit falls by only 20%.
Before running a promotion, you can use the Discount Profit Calculator to compare your regular profit with your discounted profit and estimate the discount level at which the sale reaches break-even.
Margin or markup: which should sellers use?
Both figures can be useful, but they answer different questions.
Markup is useful when you want to understand how much you have added on top of your costs.
Profit margin is useful when you want to understand how much of your sales revenue remains as profit after the costs included in your calculation.
When setting prices, the most important thing is to be clear about which measurement you are using and to include the costs that actually apply to your sale.
The takeaway
Profit margin and markup describe the same sale from two different perspectives.
- Markup is based on your cost.
- Profit margin is based on your selling price.
- A 50% markup does not equal a 50% profit margin.
- Marketplace and payment fees can reduce the profit left from a sale.
- Pricing backwards from a target margin can help you account for percentage-based selling fees.
Before deciding on a price, work from your actual costs and fees rather than relying on markup alone. Seller Ledger's free calculators can help you compare different prices, margins and selling costs before you list a product or launch a promotion.