How to Calculate Profit Margin and Markup

Step 01

Start with cost and selling price on the same basis.

Use the amount that belongs to the business calculation: normally the net selling price and net recoverable cost for a VAT-registered business, or the actual VAT-inclusive amounts where VAT cannot be recovered. Do not compare one net figure with one gross figure.

Gross profit in this guide means selling price minus the direct cost entered. It is not the final accounting profit after wages, rent, payment fees, returns, tax and other overheads.

Step 02

Use the correct denominator.

Profit margin measures gross profit as a share of the selling price. Markup measures the same gross profit as a share of cost. Because the denominators differ, the two percentages are not interchangeable.

• Gross profit = selling price − cost.
• Margin percentage = gross profit ÷ selling price × 100.
• Markup percentage = gross profit ÷ cost × 100.
• Cost ratio = cost ÷ selling price × 100.

Step 03

Worked example: £60 cost and £100 selling price.

The gross profit is £100 − £60 = £40. Margin is £40 ÷ £100 = 40%, while markup is £40 ÷ £60 = 66.67%.

If a 10% discount reduces the selling price to £90 and cost remains £60, gross profit falls to £30 and margin falls to 33.33%. The discount is 10% of revenue, but it removes 25% of the original £40 gross profit.

Step 04

Move from gross margin to a useful decision.

Add variable payment, marketplace, delivery and returns costs when they change with each sale. Use a break-even calculation to test how the resulting contribution covers fixed overheads.

For quotes and promotions, calculate the proposed selling price rather than relying on the normal list price. Record which costs are included so the percentage can be compared consistently later.

Step 05

Check the common mistakes.

• Calling markup margin, or margin markup.
• Mixing VAT-inclusive and VAT-exclusive figures.
• Calculating from a list price when a discount actually applies.
• Treating gross profit as final profit after overheads and tax.
• Dividing by zero when cost or selling price has not been entered.