Margin vs Markup: The Pricing Mistake That Costs Sellers Money
By Arshi Khan, Founder of Just4Marketing · October 6, 2026 · 6 min read
Why adding 40% to your cost doesn't give you a 40% margin, how marketplace fees make it worse, and the one formula that prices a product correctly.
Ask ten small sellers what margin they make and you'll often get a markup figure instead. The two sound alike and both are percentages, but they measure profit against different numbers — and confusing them is one of the most common reasons a product that looks profitable on paper quietly loses money.
Two percentages, two different bases
- Markup is profit as a percentage of cost. Buy for $30, sell for $42, and the $12 profit is a 40% markup.
- Margin is profit as a percentage of the selling price. The same $12 on a $42 sale is a 28.6% margin.
Same product, same profit, two very different-sounding numbers. Margin is always the smaller one, because the selling price is always bigger than the cost.
| Markup on cost | Equals margin of |
|---|---|
| 25% | 20.0% |
| 50% | 33.3% |
| 66.7% | 40.0% |
| 100% | 50.0% |
The mistake: adding your margin to your cost
Say you want a 40% margin on an item that costs $30. The instinct is to add 40%: $30 × 1.4 = $42. But as we just saw, $42 only gives a 28.6% margin. To actually keep 40% of the selling price, the price has to be $30 ÷ (1 − 0.40) = $50 — which is a 66.7% markup.
The rule is simple once you see it: to hit a target margin, divide cost by (1 − margin); don't multiply cost by (1 + margin).
Fees make the gap wider
Online sellers have a second problem. Marketplace and payment fees are usually a percentage of the selling price, so every time you raise the price to protect your margin, the fees rise too. The correct formula takes them off the top alongside your margin:
With $15 of product cost, $5 of shipping and packaging, a $0.30 fixed payment fee, 15% in percentage fees, and a 25% target margin, the price is $20.30 ÷ 0.60 = $33.83. If you'd added 25% to your $20.30 of costs instead, you'd have priced at $25.38 — and after fees you'd keep only about 5%.
When each number is useful
- Use margin for pricing decisions, comparing products, and talking to investors or lenders. It tells you how much of every sale you keep.
- Use markup when you're building a price up from supplier costs, as many wholesalers and retailers do. Just convert it to a margin before you judge whether it's enough.
- Plan for discounts. If you regularly run 20% off sales, your normal list price needs to be high enough that the sale price still meets your margin: $33.83 ÷ 0.80 = $42.29 in the example above.