01
Step one: calculate both from the same two numbers
Start with cost and selling price. Suppose a product costs 60 and sells for 100. Profit is 40. Markup divides profit by cost: 40 divided by 60 gives about 66.7 percent. Gross margin divides profit by selling price: 40 divided by 100 gives 40 percent. The profit is identical; only the denominator changes. Write both figures beside each other in a simple table for every product. Seeing them together removes the confusion quickly and shows why a seemingly large markup can correspond to a much smaller margin. Always label the percentage so colleagues know which one is being discussed.
02
Step two: convert a target margin into a price
Many owners think in margin terms, such as wanting 40 percent, then apply it as markup and fall short. To reach a target margin, divide cost by one minus the margin. With a cost of 60 and a 40 percent target, divide 60 by 0.60 to reach 100. Applying a 40 percent markup instead gives 84, which is only about a 28.6 percent margin. Build this formula into a spreadsheet column so every new cost produces a price automatically. Check a few existing products against the formula to see where current prices fall below the target you intended.
03
Step three: choose the figure for each decision
Use margin when judging profitability, comparing products or setting company targets, because it relates profit to revenue and compares cleanly with other businesses. Use markup when working from supplier cost, such as quoting a reseller price or applying a standard uplift by category. Then add real costs: discounts, payment fees, shipping and returns reduce the margin you actually keep. Recalculate after those deductions and flag products below your threshold. Review monthly, record the date of each price change, and note the reason. A short log reveals which adjustments helped and prevents the same confusion from returning.