Markup versus margin, and why they are never the same number

Two percentages, one pile of profit

Australian small businesses mix these up constantly, because both numbers describe the same $25. Markup asks “how much did I add on top of what I paid?”. Margin asks “how much of what the customer paid do I keep?”. business.gov.au’s finance guidance treats them as costing tools, not as interchangeable labels on a quote.

Profit  = selling price − cost
Markup = profit ÷ cost
Margin = profit ÷ selling price

Markup → margin:  margin = markup ÷ (1 + markup)
Margin → markup:  markup = margin ÷ (1 − margin)
Price from margin: selling price = cost ÷ (1 − margin)

The third line is the one that saves money. If you want to keep 30 cents of every dollar the customer pays, you cannot add 30% to cost. You have to divide cost by 0.7.

The $100 cost that keeps being misquoted

GST sits on top, it is not a margin

GST is 10% of the GST-exclusive selling price, or one eleventh of the inclusive total — the arithmetic in how GST works in Australia. It is money you collect for the ATO. Putting it in the profit line inflates the margin on paper and leaves you short when the BAS is due.

If your supplier’s invoice is GST-inclusive and your customer’s quote is too, convert both back to exclusive figures before you calculate markup or margin. A $110 inclusive cost and a $137.50 inclusive price look like a $27.50 profit; exclusive they are $100 and $125, which is the $25 / 20% margin above.

From a unit margin to a month of rent

A healthy margin on each sale still loses money if you do not sell enough of them to cover rent, insurance and your own pay. That is break-even: fixed costs divided by the profit in one unit.

Contribution per sale = selling price − variable cost
Break-even units      = monthly fixed costs ÷ contribution per sale

Worked numbers

Rent and insurance of $4,000 a month, $125 ex-GST price, $100 cost: each sale contributes $25. You need 160 sales a month before you have covered the fixed costs, and only the 161st sale is profit in the ordinary sense. The break-even calculator is that division; the margin calculator is how you got the $25.

• Pick one language — markup or margin — and convert before you talk to anyone else.
• Set prices from the margin you need, not from a round markup that feels right.
• Keep GST out of both sides of the fraction.
• Do not discount by the same percentage you marked up.

Common questions