Markup and margin are not the same number
Both measure the same dollar of profit. They differ only in what they divide it by, and confusing them is the most expensive arithmetic mistake in small business pricing.
The short answer
Markup is profit as a percentage of cost; margin is profit as a percentage of the selling price. A $100 item sold for $150 carries a 50% markup and a 33.3% margin — the same $50 of profit measured against two different bases. Margin can never reach 100%; markup has no ceiling.
The conversion worth memorising
Three pairs cover most real pricing decisions. A 100% markup is a 50% margin. A 50% markup is a 33.3% margin. A 33.3% markup is a 25% margin.
The pattern is that markup is always the larger number, and the gap widens as both grow. The formulas are short: margin = markup ÷ (1 + markup), and markup = margin ÷ (1 − margin), with both expressed as decimals.
Margin approaches but never reaches 100 per cent, because profit cannot exceed the price it is measured against. Markup has no upper limit at all — a $1 item sold for $20 carries a 1,900 per cent markup and a 95 per cent margin.
Where the money actually goes missing
The failure is rarely dramatic. It is a business that prices its whole catalogue at a 50 per cent markup while budgeting on a 50 per cent margin.
Every individual price looks reasonable. The margin achieved is 33.3 per cent rather than 50, so a third of the expected gross profit never arrives — and because nothing looks wrong at the item level, it usually surfaces months later as an unexplained gap between forecast and actual.
On $500,000 of revenue that gap is over $80,000. It is not a rounding error, and it is entirely avoidable by writing down which measure a pricing rule refers to.
Price on markup, report on margin
Markup is the practical tool at the point of pricing, because it works forward from the number you already have. Cost is known; markup gives you the price directly.
Margin is the number everything else speaks in. Financial statements report gross margin. Break-even calculations use margin. Advertising return is judged against margin. Every conversation about whether the business is working happens in margin.
Use both, convert deliberately, and never assume they are close enough to substitute.
Keep GST out of it
GST in New Zealand is 15 per cent, and it is not revenue. You collect it on Inland Revenue's behalf and pay it across.
So the whole pricing calculation should run in GST-exclusive figures — cost excluding GST, price excluding GST — with GST added only at the end to produce the shelf price. Mixing a GST-inclusive price with a GST-exclusive cost inflates the apparent margin by a large and entirely fictional amount.
It is a common error in businesses that quote retail prices internally, because the number everyone says out loud is the inclusive one.
The same applies to freight and payment processing. If you cover them, they belong in cost of goods sold — on a low-value product those two together can be five to ten points of margin.
Where these numbers come from
- Inland Revenue — GST rate in New Zealand GST is 15% and is excluded from margin calculations
- Standard accounting — gross margin and markup Fixed definitions
Method last reviewed 2026-10-28 This guide is re-checked against the sources above at least once a year, and again whenever a rule it explains changes. Out of date? Tell us and we will fix it.