Margin and markup are calculated on different bases — confusing them means you will either underprice your products or report the wrong profitability to the ATO. This guide explains both with worked Australian business examples.
Margin and markup are both ways of expressing the relationship between cost and selling price — but they are calculated on different bases and give different percentages even on the same transaction. Confusing them leads to systematic pricing errors.
On the same sale — $100 cost, $150 selling price, $50 gross profit — the markup is 50% but the margin is only 33.3%. If you tell your accountant you're making a "50% margin" when you mean a 50% markup, you're overstating your profitability by a significant amount.
Enter cost price and target margin or markup to find the correct selling price instantly.
Open Profit Margin Calculator →| Metric | Formula | Example ($100 cost, $140 price) |
|---|---|---|
| Gross profit | Revenue − Cost | $140 − $100 = $40 |
| Gross margin % | Profit ÷ Revenue × 100 | $40 ÷ $140 × 100 = 28.6% |
| Markup % | Profit ÷ Cost × 100 | $40 ÷ $100 × 100 = 40% |
| Selling price from margin | Cost ÷ (1 − margin) | $100 ÷ 0.714 = $140 |
| Selling price from markup | Cost × (1 + markup) | $100 × 1.40 = $140 |
| Item | Cost | Sell Price (ex GST) | Markup | Margin |
|---|---|---|---|---|
| T-shirt | $15 | $45 | 200% | 66.7% |
| Jeans | $40 | $100 | 150% | 60% |
| Shoes | $60 | $150 | 150% | 60% |
| Item | Cost | Charged to Client | Margin |
|---|---|---|---|
| Parts/materials | $200 | $280 (+40%) | 28.6% |
| Labour (3hrs at cost $90/hr) | $270 | $450 | 40% |
| Total job | $470 | $730 | 35.6% |
If you know your target gross margin and your cost, the selling price formula is: Selling price = Cost ÷ (1 − Target margin)
To achieve a 60% gross margin on a $25 product cost: $25 ÷ (1 − 0.60) = $25 ÷ 0.40 = $62.50
Remember this is gross margin — it does not account for operating costs (rent, wages, utilities, marketing). Net margin after all operating costs is what determines actual business profitability.
When calculating margins for income tax reporting, always use GST-exclusive amounts. GST collected on sales is held on behalf of the ATO and is not your income. Your assessable business income is the GST-exclusive value of your sales. Running margin calculations on GST-inclusive figures overstates revenue and understates your true margin percentages.
Because the two are calculated on different bases — margin on the selling price, markup on the cost — they are not interchangeable, and converting between them requires arithmetic rather than assumption.
Margin from markup: Margin = Markup ÷ (1 + Markup)
Markup from margin: Markup = Margin ÷ (1 − Margin)
A 50% markup produces a 33.3% margin. A 50% margin requires a 100% markup. A 100% markup produces a 50% margin. These pairs are frequently mistaken for one another, and the error always runs in the same direction: the business believes it is making more than it is.
You buy an item for $60 and apply a 40% markup. The selling price is $60 × 1.4 = $84. The gross profit is $24. The margin is $24 ÷ $84 = 28.6%, not 40%.
If instead you want a 40% margin, the selling price must be $60 ÷ (1 − 0.40) = $100. That is a 66.7% markup. The gap between the two approaches on a single item is $16 — and across a year of trading, it is the difference between profit and loss.
Gross margin measures what remains after the direct cost of goods sold. It says nothing about rent, wages, insurance, software, or interest.
A business can operate at a healthy gross margin and still lose money, because gross margin has to cover every fixed cost before anything reaches the bottom line. Net margin, calculated after all expenses, is the figure that determines whether the business is viable.
When comparing your margin to an industry benchmark, confirm which margin is being quoted. Benchmarks for retail gross margins and net margins differ by an order of magnitude, and comparing one against the other produces false comfort or false alarm.
Discounting is where margin arithmetic becomes urgent, because a small discount consumes a large share of profit.
Suppose an item sells for $100 with a 30% gross margin, meaning $30 of gross profit. A 10% discount reduces the price to $90 and the gross profit to $20 — the discount has removed a third of the profit, not a tenth.
To earn the same total gross profit at the discounted price, you must now sell 50% more units. This is why across-the-board discounting frequently increases revenue while reducing profit, and why businesses with thin margins can discount themselves out of existence while appearing busy.
Markup is calculated on cost. Margin is calculated on the selling price. They answer different questions, they produce different numbers from the same transaction, and confusing them consistently flatters the business.
Calculate on GST-exclusive figures, include every variable cost in cost of goods sold, be clear whether you are discussing gross or net margin, and model the true cost of discounting before running one.
This page is general information only and is not accounting or tax advice. For pricing, reporting, and GST treatment specific to your business, speak with a registered tax agent or a qualified accountant.
What is the difference between margin and markup?
Margin (gross profit margin) is gross profit divided by revenue — it tells you what percentage of your selling price is profit. Markup is gross profit divided by cost — it tells you what percentage above cost you are charging. On a $100 cost item sold for $150: markup is 50% ($50 profit on $100 cost), but margin is 33.3% ($50 profit on $150 revenue).
What is a good profit margin for an Australian small business?
Acceptable margins vary significantly by industry. Retail typically operates on 30-50% gross margin. Professional services can achieve 60-80%. Food and hospitality often achieves 60-70% gross margin but has high operating costs. The key metric is net margin (after all costs) — ASIC MoneySmart suggests a net margin of 5-10% is healthy for most small businesses.
How do you calculate selling price from cost and desired margin?
If you want a 40% gross margin, divide the cost by (1 - 0.40) = 0.60. So a $60 cost item needs a selling price of $60 ÷ 0.60 = $100 to achieve a 40% margin. Alternatively, to get a 40% markup on a $60 item: $60 × 1.40 = $84 — which is a margin of only 28.6%, not 40%. The two calculations give very different answers.
Does GST affect my profit margin calculation?
When calculating profit margin for business purposes, always use GST-exclusive prices. GST collected belongs to the ATO — it is not your revenue. A $110 sale (including $10 GST) has revenue of $100 for margin calculation purposes. Including GST in revenue will artificially inflate your apparent turnover and distort your margin percentages.