Margin vs. markup: differences, formulas and examples in zloty
In brief
- Margin is profit divided by the sales price. Markup is the same profit divided by the purchase cost. The markup always comes out higher.
- A 100% markup is a 50% margin. A 50% markup is a 33.3% margin. You convert with the formula: margin = markup / (100% + markup).
- Margin will not go above 100%, markup can. Anyone talking about a “150% margin” is talking about markup.
- Work with net amounts. A gross price against a net cost inflates the result: a real 30% margin then looks like 43%.
- A 20% discount on a product with a 35% margin takes 57% of the profit per unit, not 20%.
Margin and markup are two ways of describing the same profit: margin divides it by the sales price, markup by the purchase cost. On the same transaction the markup comes out higher, so 30% in the wholesaler's mouth and 30% in your price list are two different amounts. Below you will find the formulas, a conversion table and three calculations in zloty.
Margin vs. markup: what the difference is
Take one product. You buy it for PLN 100 net and sell it for PLN 150 net. The profit is PLN 50 and that is the only number that reaches your account. The rest comes down to what you divide that fifty by.
Divide by PLN 150, that is by the sales price, and you get a 33.3% margin. Divide by PLN 100, that is by the cost, and you get a 50% markup. The same transaction, two numbers, no contradiction.
The practical upshot is that margin answers the question “how much of every zloty from the customer stays with me”, while markup answers “how much am I raising the purchase price”. That is why accountants and analysts work with margin, while markup is used by the people who set prices in a store or in a service price list.
There is a simple warning sign: margin will never go above 100%, because profit cannot be larger than the price that contains it. Markup has no such limit, and in a coffee shop or a flower shop it comfortably passes 300%. So when you hear about a “200% margin”, the other person is talking about markup, and it is worth asking before you build a price list on it.
In conversations with suppliers this misunderstanding costs the most. The wholesaler promises “thirty percent for you”, you put a 30% margin in your price list, and a month later you have no idea why you are earning less than you counted on. One question, what they calculate it from, settles the matter in five seconds.
Formulas and conversion table
Formulas for margin and markup
For all of this you need three numbers: the net sales price, the net unit cost and the difference between them. Let us call them S, C and P (profit).
- Margin percentage = P / S × 100%
- Markup percentage = P / C × 100%
- From markup to margin: margin = markup / (100% plus markup)
- From margin to markup: markup = margin / (100% minus margin)
- Price from margin: S = C / (100% minus margin)
The last formula is the one fewest people know, and everyone who sets prices needs it. If you want a 40% margin on a product bought for PLN 60 net, the price is not PLN 84 (that is only a 40% markup), but PLN 100. At 200 units a month, that PLN 16 difference per unit adds up to PLN 3,200 that nobody in the company will notice.
50% margin is the same as a 100% markup
33,3% margin comes out of a 50% markup
23% standard VAT rate in Poland
If you do not want to work this out in your head or in a spreadsheet, drop the cost and the price into our margin calculator. It shows margin and markup side by side, so you see right away which number you had wrong.
Markup to margin in a table
This table replaces the formula in nine situations out of ten. The last column is the share of cost in the price, known in food service as food cost. It always comes to 100% minus the margin, so if someone keeps food cost at 30%, what they are really keeping is a 70% margin.
| Markup | Margin | Net price | Cost in price |
|---|---|---|---|
| 20% | 16,7% | PLN 120 | 83,3% |
| 25% | 20,0% | 125 PLN | 80,0% |
| 30% | 23,1% | PLN 130 | 76,9% |
| 50% | 33,3% | 150 PLN | 66,7% |
| 75% | 42,9% | PLN 175 | 57,1% |
| 100% | 50,0% | 200 PLN | 50,0% |
| 150% | 60,0% | PLN 250 | 40,0% |
| 200% | 66,7% | 300 PLN | 33,3% |
Look at the top of the table. Going from a 20% markup to 25% raises the margin by only 3.3 points and the price by PLN 5. At low markups the two numbers sit close together and a mix-up barely hurts. The higher you go, the further apart they drift, which is why confusing the terms wrecks the math in services and in food service.
Three examples in zloty
Online store: a lamp
You buy a lamp from a distributor for PLN 80 net and sell it for PLN 149 net. Profit PLN 69, margin 46.3%, markup 86.3%. It looks good until you add in the costs that also disappear with that single unit.
Example
Lamp: price PLN 149 net, purchase PLN 80 net. Gross profit per unit PLN 69, margin 46.3%. Add the courier at PLN 14, the box and filler at PLN 3, and the payment fee at roughly PLN 2. The cost rises to PLN 99, the profit drops to PLN 50, and the margin to 33.6%. Throw in one return per ten orders: the courier both ways and a crushed box come to about PLN 33, spread across the nine units sold. The margin falls to 31%.
This is a sample calculation based on rounded rates. Put in your own numbers from last month's invoices.
The conclusion from this box is boring and expensive: the margin in your price list and the margin after real carts are two different numbers. That is why it pays to know how much is left per unit before you talk about building a store. The same shipping and payment fee costs have to go into the plan when you check online store cost and after how many orders it pays for itself.
Repair shop: replacing brake pads
A service at PLN 600 net. Parts PLN 220 net, two hours of a mechanic's time at PLN 60, for a total direct cost of PLN 340. Profit PLN 260, margin 43.3%, markup 76.5%.
In services, a markup calculated only on parts says nothing useful, because the biggest cost is time. If you leave out labor and divide PLN 380 by PLN 220 of parts, you get a 173% markup and the job looks like a gold mine. With a service, stick to margin and put every hour you pay someone for into the cost.
Coffee shop: a cappuccino
Price PLN 16 gross. Coffee is taxed at 23%, so PLN 13.01 is left net. Beans, milk, cup and lid come to PLN 2.40 together. Profit PLN 10.61, margin 81.6%, markup 442%.
That 442% looks great until rent, the barista's wages and the cups that went in the bin enter the picture. Markup in food service is high precisely because it has to cover the costs you do not see on the receipt. Two tables fewer a week and the margin on a cappuccino stops mattering.
How to calculate margin step by step
Below is the order that works in a small business when you are setting a price list for a new season or checking the old one.
- Collect the net prices. Take the sales price and the purchase price from the same side of VAT. Mixing gross with net is the most common mistake in this whole subject.
- Work out the unit cost. To the purchase price add everything that disappears along with one unit or one service: inbound transport, packaging, shipping, the payment fee, hours of work.
- Subtract and divide. You divide the profit by the price when you want margin, and by the cost when you want markup. Write down which number you quoted, because in a week you will not remember.
- Check the result in a calculator. Two independent calculations on one product catch a misplaced decimal point better than reading the spreadsheet again.
- Set a floor you do not go below. One number per category, written into the price list. Without it, every discount is a gut call.
The fourth step takes a few dozen seconds, and the fifth cannot be made up for later, because discounts are given away in conversation, not in a spreadsheet.
Common VAT mistakes
The standard VAT rate in Poland is 23%, alongside rates of 8% and 5%, set out in the Polish VAT Act. For margin, one thing matters: the VAT you receive from the customer is not your revenue, it is money to be passed on.
Note
A product at PLN 123 gross with a cost of PLN 70 net has a 30% margin, because it is calculated from PLN 100 net. If you plug in the gross price, you get 43.1%, which is 13 percentage points of margin that do not exist. In amounts: the real profit is PLN 30 per unit, the apparent one PLN 53. Across two hundred units the difference reaches PLN 4,600 of profit that exists only in the spreadsheet.
The second mistake shows up where the rates on the purchase side and the sales side differ. A coffee shop sells a meal at 8% and coffee and alcohol at 23%, so one average margin for the whole venue blurs completely different products. Classification depends on the details of the sale, and you will find a list of rates on the podatki.gov.pl website.
The third concerns businesses using the VAT exemption. You do not deduct the tax from purchase invoices, so your real cost is the gross amount and you calculate the margin from it. Copying a formula from a colleague who is a registered VAT payer will inflate your result by a dozen or so percent. This is information, not tax advice: confirm your rates and your right to deduct with your accountant.
Margin vs. discounts and advertising cost
Margin stops being a number in a spreadsheet the moment you give a discount. A product at PLN 100 net with a cost of PLN 65 gives PLN 35 of profit. A 20% discount cuts the price to PLN 80, the cost stays the same, so the profit drops to PLN 15. You gave away 20% of the price and 57% of the profit per unit.
Hence a simple rule: before you announce a promotion, convert it into profit, not into a percentage of the price. It helps to use the discount calculator, because it shows how much sales have to rise for the lower price to pay off.
The second limit is advertising. At a 35% margin, every zloty of revenue leaves 35 grosz to cover advertising, so a campaign starts making money above a ROAS of about 2.9. At a 20% margin that threshold jumps to 5.0, and that is an entirely different campaign. Calculate yours in the ROAS calculator and compare it with the margin from your price list.
Before you raise prices, check the other lever: the same traffic buying more often and spending more. When you sell products, the reserves sit in the product page, in delivery costs and in the cart, so we work that part out together with the client when building a WooCommerce store.
If you want someone to walk through your numbers with you and show where margin is leaking in your store, order free audit or call 511 608 362 Monday through Friday between 10 a.m. and 6 p.m.
Frequently asked questions
Can a margin be higher than 100%?
No, not if the cost is positive. Margin is the share of profit in the price, and profit is never larger than the price that contains it. A number above 100% means a markup or a mistake in the base you divided by.
How do you calculate margin when you know the markup?
Divide the markup by 100% plus the markup. A 60% markup gives 60 / 160, which is a 37.5% margin. The other way around, markup = margin / (100% minus margin), so a 40% margin is a 66.7% markup.
Should margin be calculated on net or gross amounts?
On net amounts, if you are a registered VAT payer and deduct the tax on your purchases. If you use the VAT exemption, your cost is the gross amount from the purchase invoice, and then you calculate from the gross figure on the cost side. What matters most is that the price and the cost come from the same side of VAT.
What margin is good for an online store?
There is no single number, because electronics and jewelry live in different worlds. The sensible benchmark is your own: work out what is left after shipping, payment fees and returns, and check whether that covers your fixed costs at your order volume. Only that difference tells you whether the margin is good.
What is food cost in the restaurant business?
It is the share of ingredient cost in the net price of a dish, that is 100% minus the margin. A 28% food cost means a 72% margin. Venues watch this number because it is easier to compare across menu items than markup, which runs into hundreds of percent with cheap ingredients.
