Margin and markup are not the same number

This is the most expensive arithmetic mistake in small business, and it is not really an arithmetic mistake. Both numbers are correct. They answer different questions, and the person setting the price often does not know which one they were given.

The difference is the denominator

Both start with the same profit: what you charged, less what it cost you. They differ in what they divide it by.

profit  =  price  -  cost

markup  =  profit / cost      measured against what it cost you
margin  =  profit / price     measured against what you charged

Price is always larger than cost on a sale that makes money, so the markup is always the larger percentage. That is exactly why it is the one people quote, and why it flatters.

The mistake, in dollars

Say a product costs you $100 and you want a 40% margin. The price that achieves it is not $140.

Wanted:   40% margin
Correct:  price  =  cost / (1 - margin)  =  100 / 0.60  =  $166.67
          profit = $66.67,  margin = 40.0%

Applied as a markup instead:
          price  =  cost x 1.40          =  $140.00
          profit = $40.00,  margin = 28.6%

Lost on every single unit:                  $26.67

The mistake gets worse as your target rises, because the two curves diverge. At a 10% target the gap is small. At a 60% target the correct price is $250 and the markup version is $160, which is a 37.5% margin: $60 of profit where you were planning on $150, so you would have kept less than half of it.

Which one to use

• Margin, when you are setting a price or comparing yourself with anyone else. It relates to revenue, which is the number on your income statement and the number in every published benchmark for your industry.
• Markup, when you are applying a rule to a cost. A trade that puts a standard multiple on materials is using markup, and correctly so.
• Never mix them in one conversation. If someone tells you a number, ask which it is. The word people use is not reliable.

Two things that catch people after this

You cannot have a 100% margin. A 100% margin means the cost is zero. As the target approaches 100%, the price required goes to infinity. Markup has no ceiling at all, which is a third reason the two get confused: one of them has a limit and the other does not.

Margin on what, exactly. Gross margin uses the direct cost of the thing you sold. It is not your profit. Rent, software, insurance and your own salary come out afterwards, and a healthy gross margin on a product that sells forty units a month can still be a business that loses money. Break-even is the other half of this question.