Margin uses revenue as the base
Profit margin measures profit as a percentage of the selling price or revenue. If a product sells for $100 and costs $60, the $40 gross profit is 40% of the $100 selling price.
The basic relationship is margin = profit ÷ revenue. This makes margin useful when you want to understand how much of each sales dollar remains after the cost being measured.
Markup uses cost as the base
Markup measures the amount added to cost as a percentage of cost. Using the same $60 cost and $100 selling price, the $40 increase is a 66.67% markup because $40 is two thirds of $60.
The relationship is markup = profit ÷ cost. Because the denominator is smaller than revenue, markup is normally higher than margin for the same transaction.
Pricing for a target margin
If you know cost and want a specific margin, simply adding that percentage to cost does not produce the same margin. A $60 cost plus 40% markup gives an $84 price, but the margin is only about 28.6%.
To price for a 40% margin, divide cost by 1 minus the target margin: $60 ÷ 0.60 = $100.
Use the right metric for the question
Margin is often better for reviewing profitability relative to sales. Markup is often convenient for building a price from cost. Contribution margin focuses on the amount left after variable cost and is useful for break-even analysis.
- Margin = profit ÷ revenue.
- Markup = profit ÷ cost.
- Target-margin price = cost ÷ (1 − margin).
- Use consistent definitions of cost across comparisons.