Margin and markup are two ways of describing the same profit, and they produce different numbers from identical costs. Confusing them is the most expensive arithmetic mistake in handmade selling, because it quietly undercharges you by ten to thirty percent.
The definitions, once
Markup is profit as a multiple of your cost. Buy at 100, sell at 140, and your markup is 40 percent.
Margin is profit as a share of your selling price. Buy at 100, sell at 140, and your profit of 40 is 28.6 percent of the 140 price.
Same sale. Two different percentages. The markup figure is always the larger and more flattering one.
Why this matters more for makers than for shops
A shop buys at 40 and sells at 100, and nobody describes that as a 150 percent anything. Trade pricing is quoted in margin or in a multiplier, and it is understood.
Handmade sellers picked up "I add 40 percent" from somewhere and applied it to cost. That is markup. Then they hear that handmade businesses should run at a 40 percent margin and assume they are already there. They are not: a 40 percent markup is a 28.6 percent margin, which is eleven points short.
The conversion, in both directions
| Markup | Margin |
|---|---|
| 10 percent | 9.1 percent |
| 20 percent | 16.7 percent |
| 25 percent | 20.0 percent |
| 33 percent | 25.0 percent |
| 43 percent | 30.0 percent |
| 50 percent | 33.3 percent |
| 67 percent | 40.0 percent |
| 100 percent | 50.0 percent |
| 150 percent | 60.0 percent |
| 233 percent | 70.0 percent |
The formulas, if you want to work a figure that is not in the table:
- margin = markup / (1 + markup)
- markup = margin / (1 - margin)
Watch the shape of it. To reach a 40 percent margin you need a 67 percent markup, not a 40 percent one. To reach 50 percent margin you need to double your cost. Margin climbs slowly and then very fast, which is why the last few points are so hard to reach.
Which should you use?
Use margin for pricing, because fees and discounts are also percentages of the selling price and only margin adds up cleanly with them.
Use markup only when you are applying a simple uplift to a known cost and you are not trying to compare the result to anything.
The mistake in practice
A maker costs a piece at 30 dollars and wants a 50 percent margin. They add 50 percent and price it at 45 dollars. The actual margin is 33 percent, and after a 12.5 percent platform and payment fee they keep 45 minus 5.63 minus 30, which is 9.37 dollars, or 20.8 percent of the price.
Correctly priced at a 50 percent margin with the same fees, the price would be 30 divided by (1 - 0.50 - 0.125), which is 80 dollars. That is a 35 dollar difference on a 30 dollar item, and it is the difference between a hobby that costs money and a business that does not.
Discounts are worse than they look
A discount comes off the price and takes a disproportionate bite out of margin, because your cost does not move.
Knock 20 percent off a 80 dollar price and you have 64 dollars. Your cost is still 30 and your fees are still 12.5 percent of 64, which is 8 dollars. Your profit falls from 30 dollars to 26 dollars. Your margin falls from 37.5 percent to 40.6 percent of the new price but your cash profit dropped 13 percent for a 20 percent discount.
Now try 40 percent off: price 48 dollars, fees 6 dollars, profit 12 dollars. You have given away two thirds of your profit to move 40 percent off the price. Discounts are a legitimate tool and they are not free, and knowing the real cost of one is what stops you from running a sale that makes no sense.