Markup vs margin: why 25% on cost is not 25% on sales

When a business buys goods and sells them for more, the difference is gross profit. That part is simple. What trips students up is that this one profit can be described in two ways, and both are correct.

One way compares the profit with what the goods cost. The other compares it with what they sold for. The profit in money is the same either way, but the percentages are not.

One profit, two ways to describe it

Imagine a shop that buys an item for RM100 and sells it for RM125. The gross profit is RM25. Nobody argues about that.

But “what percentage is that profit?” is not yet a complete question. A percentage compares one number against another. Here there are two choices: the RM25 against the RM100 cost, or the RM25 against the RM125 selling price.

The first is markup. The second is margin.

Markup: profit measured against cost

Markup starts from what the seller paid. It asks: for every ringgit spent buying the item, how much profit was added on top? Here RM25 sits on a cost of RM100, so the markup is 25 per cent.

Markup is the natural language of someone setting a price. You start at cost and build upward.

Margin: profit measured against selling price

Margin describes the same RM25, but measures it against the selling price. It asks: out of every ringgit the customer pays, how much is profit? RM25 out of RM125 is 20 per cent.

Margin is the natural language of someone reading accounts. Sales is the top figure of the income statement, and margin shows how much of it is left as gross profit.

The same money, two different percentages

The profit was RM25 in both descriptions. Nothing about the shop, the item or the sale changed. Yet markup is 25 per cent and margin is 20 per cent.

The only difference is the base. RM25 out of RM100 is a bigger slice than RM25 out of RM125. So a markup of 25 per cent is not a margin of 25 per cent.

It is a margin of 20 per cent. If you read “25 per cent” without asking “of what?”, you can picture a different business from the real one.

Why the base changes the answer

A percentage means “so much per hundred”, but per hundred of what? Markup and margin share the same top figure, the gross profit. They differ only in the figure underneath.

The selling price is always larger than the cost when there is a profit. So the same profit is a smaller share of the selling price. That is why margin is always the lower of the two, and why the gap grows as the profit grows.

Converting between the two

Because both describe one profit, you can turn one into the other by thinking about the base. Take a markup of 25 per cent. Think of the cost as four equal parts.

The profit is one more part, so the selling price is five parts. The margin is one part out of five, which is 20 per cent.

Going the other way works the same. A margin of one fifth means the selling price is five parts and the profit is one. The cost is the other four parts.

Profit against cost is one in four, or 25 per cent. You do not need to memorise a formula. You just change which figure the profit is measured against.

Why a business cares which one it uses

When setting prices, markup is more natural, because pricing starts from the known cost and adds a proportion.

When an owner or lender wants to judge performance, margin is more useful. It shows how much of each ringgit of sales was kept as gross profit, and it can be compared across years. Quoting a margin as if it were a markup while pricing builds an error into every price.

Always ask: a percentage of what?

Make a habit of asking what the base is before you trust any profit percentage. Neither markup nor margin is more correct. They are two honest descriptions of one gross profit, seen from the two ends of the same sale.

If markup and margin questions keep giving you the wrong percentage, one of our teachers can work through both bases with your child, one-to-one, using past-paper style figures. Book a trial class

Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 5.1 Sole traders (page 15).