Profit Margin vs Markup vs ROI: What Each Means

Margin, markup and return on investment all describe profit as a percentage, but of different things. Mixing them up leads to prices that earn less than you planned.

Margin versus markup

• Markup is profit as a share of the cost.
• Margin is profit as a share of the selling price.

Something that costs 60 and sells for 100 makes 40 profit. The markup is 40 / 60 = 66.7 percent, and the margin is 40 / 100 = 40 percent. The same profit gives a smaller margin than markup, so a 50 percent markup is only a 33 percent margin.

Setting a price

• From a target margin: divide the cost by one minus the margin. A 40 percent margin on a cost of 60 gives 60 / 0.6 = 100.
• From a target markup: multiply the cost by one plus the markup. A 50 percent markup on 60 gives 90.
• A margin of 100 percent is impossible, because it would mean the cost is zero.

The Profit Margin & Markup Calculator works any of these directions and shows margin, markup, profit, cost and price together.

Return on investment

ROI compares what you gained with what you put in: subtract the amount invested from the final value, and divide by the amount invested. Put in 1,000 and get back 1,500, and the ROI is 50 percent. To compare investments held for different lengths of time, turn it into a yearly rate, which for 50 percent over 2 years is about 22.5 percent a year. The ROI Calculator does both.

Costs and tax

• Include fees and running costs in the cost, or your margin is overstated.
• If your prices include VAT, take it out first, using the Sales Tax & VAT Calculator, because it isn't your income.
• A high ROI says nothing about risk, so compare how bumpy the ride was too.