Selling & pricing
Margin, cost ratio and markup explained
"Leave me a 30% margin" can mean two different prices. Whether the 30% is measured against revenue or against cost changes the answer significantly.
Updated August 25, 2026 · About 2 min read
Contents
- Margin = profit / revenue. Markup = profit / cost.
- Cost ratio = cost / revenue, the mirror image of gross margin.
- Buying at 10 and selling at 20 is a 50% margin but a 100% markup.
- A margin that ignores fees and shipping is not the margin you keep.
The three definitions
Gross margin is the share of revenue left after the cost of goods: profit divided by revenue.
Cost ratio is the mirror image: cost divided by revenue.
Markup describes how much was added on top of cost: profit divided by cost.
- Cost 10, price 20
- Margin = 10 / 20 = 50%
- Cost ratio = 10 / 20 = 50%
- Markup = 10 / 10 = 100%
Why they get mixed up
The denominator differs. Margin divides by revenue, markup divides by cost, so the same transaction produces 50% and 100%.
If you and a supplier each assume a different basis, the agreed price will be wrong. Settle the basis before quoting a number.
Working backwards from a target margin
To keep a 30% margin, divide the cost by 0.7 rather than adding 30% to it. A cost of 10 becomes 14.29.
Adding 30% gives 13, and the profit of 3 is only 23% of revenue — not the margin you intended.
When a marketplace fee applies, subtract it in the denominator too: cost / (1 - margin - fee rate).
Judge on net profit, not gross margin
Gross margin ignores marketplace fees, payment processing, shipping, packaging, advertising and returns.
Calculating the margin after all of those keeps you from the classic trap of rising revenue with nothing left at the end of the month.
Keep tax consistent
Mixing a tax-inclusive price with a tax-exclusive cost inflates the margin.
If you are registered for VAT or sales tax, run every figure on a tax-exclusive basis.