Guide
Margin vs markup: what a supplier cost increase does to your price
A supplier raises the cost of an item from 10.00 to 11.00. Your shelf price is 20.00. Someone says "we need to put the price up 5%." Someone else says "no, 10%." They are both using a real formula, and they are answering different questions. This guide sets out the two numbers, the two ways to reprice, and the trap in each.
Margin and markup are different fractions
Both start from the same amount, the difference between what you sell for and what you paid. They divide it by different things.
- Gross margin is that difference as a share of the selling price. Sell at 20.00, cost 10.00: margin is 10.00 divided by 20.00, which is 50%.
- Markup is the same difference as a share of the cost. 10.00 divided by 10.00 is 100%.
Markup is always the larger number for the same product. A 50% margin is a 100% markup; a 30% margin is about a 43% markup; a 20% margin is a 25% markup. This is why two people can look at one product and quote different percentages without either being wrong.
One more distinction. Gross margin counts only the supplier's cost of the goods. Freight, packaging, card fees, rent and wages come out afterwards. A 50% gross margin is not 50% profit.
What the cost increase does if you leave the price alone
Cost 11.00, price still 20.00. Your money per unit drops from 10.00 to 9.00. Your margin drops from 50% to 45%. That is a fall of five percentage points, not a fall of 5%: your profit per unit actually fell by 10%. Points and percent are different units, and mixing them up is the most common error in this conversation.
Two honest ways to reprice
Keep the same margin percent
New price = new cost divided by (1 minus your old margin). 11.00 divided by 0.5 is 22.00. That is a 10% price increase, the same percentage as the cost increase. This is always true: to keep a margin percent, the price must rise by the same percentage as the cost, whatever the margin is.
The trap: a 10% price rise on a visible retail item may cost you sales. Keeping the margin percent is a rule of thumb, not a law.
Keep the same money per unit
New price = old price plus the cost increase. 20.00 plus 1.00 is 21.00, a 5% rise. You still make 10.00 on each unit. Your margin percent slips a little, from 50% to about 47.6%, because the same 10.00 is now a smaller share of a bigger price.
The trap: if your overheads are budgeted as a percent of sales, a falling margin percent shows up as a problem at year end even though unit profit held.
A quick reference
| Old cost | New cost | Price | Margin before | Margin after, same price | Price to keep margin | Price to keep unit profit |
|---|---|---|---|---|---|---|
| 10.00 | 11.00 | 20.00 | 50.00% | 45.00% | 22.00 | 21.00 |
| 12.50 | 13.75 | 24.00 | 47.92% | 42.71% | 26.40 | 25.25 |
| 4.20 | 4.62 | 9.50 | 55.79% | 51.37% | 10.45 | 9.92 |
| 30.00 | 28.50 | 55.00 | 45.45% | 48.18% | 52.25 | 53.50 |
The last row is a cost decrease, and the same two formulas tell you how much of it you can pass on while keeping your margin or your unit profit.
Doing this for one product, or for a whole list
For a single item, the margin calculator on this site takes the old cost, the new cost and your price and returns all of the numbers above. For a whole supplier list, the price list checker matches the old and new lists by product code and, if you include a selling price column, shows the old margin, new margin and the change in points on every row of the report.