Margin and markup are not the same number

Both describe the gap between what something cost you and what you sold it for. They differ in what they divide that gap by, and that single difference is why a business can hit its target percentage every month and still be thinner than it planned.

The two formulas

• Markup is profit divided by cost. It answers: how much did I add on top?
• Margin is profit divided by selling price. It answers: how much of the money I took home is mine?

Buy at 1,200 and sell at 1,850. The profit is 650 either way. As a markup, that is 650 over 1,200, so 54.17%. As a margin, it is 650 over 1,850, so 35.14%. Same transaction, two honest numbers, nineteen points apart.

Why it matters in practice

Suppose you need a 40% margin to cover overheads. If you apply a 40% markup instead, you land on a 28.6% margin, about eleven points short. On 50 lakh of annual revenue that gap is roughly 5.7 lakh, which is the difference between a workable year and a tight one. Nothing in your day-to-day would flag it, because every individual sale looked like it hit target.

Which one to use when

• Setting a price from a known cost: think in markup, because cost is what you have.
• Reporting profitability, or comparing against industry benchmarks: think in margin, because that is the convention.
• Talking to a marketplace, investor or accountant: they mean margin unless they say otherwise.

Discounts eat margin faster than you think

A discount comes straight out of profit, not out of revenue proportionally. On a 33% margin, a 10% discount does not cost you a tenth of your profit, it costs you close to a third of it, because the cost side does not move. This is why a sale that looks mildly generous can wipe out the month.