Markup vs Margin Calculator

Definitions, formulas and assumptions

The three measures use different denominators and stop at different costs

Markup and gross margin describe the same money over two different denominators. Gross margin and contribution margin use the same denominator and stop at two different cost layers. Every disagreement between two “margin” figures comes from one of those two facts.

Because the additional variable costs are never negative, the contribution margin on this page is always less than or equal to the gross margin. Where they are equal, it means no variable cost beyond direct product cost was entered — not that none exists.

The formulas

Let C be unit product cost, P the sale price, r the combined percentage fee as a decimal, F the fixed order fee, S the seller-paid fulfilment per order, U the average units per order and Vthe other variable cost per unit.

allocated order cost   A = (F + S) / U
variable cost base     B = C + V + A
markup                 m = (P − C) / C          undefined where C = 0
gross margin           g = (P − C) / P
total variable cost   VC = B + P × r
contribution per unit CP = P − VC = P × (1 − r) − B
contribution margin    c = CP / P

Solving a price backwards from a target

The two target modes invert two different identities, and the difference is the reason they are separate modes rather than one:

price for a target gross margin        P = C / (1 − g)
price for a target contribution margin P = B / (1 − r − c)

The first uses only the product cost and the target. The second carries the whole variable-cost base in the numerator and subtracts the percentage fee inside the denominator, because a fee charged on revenue scales with the very price being solved for. Using the first formula for a contribution-margin target understates the price, and the worked example below shows by how much.

Where 1 − r − c is zero or negative, the fee and the target together claim every unit of revenue, so no price satisfies the target. The tool says so in words rather than showing an enormous or negative number.

Fixed monthly costs and break-even

monthly contribution        MC = CP × Q
monthly result              MO = MC − H
whole break-even units    Q_BE = ceiling(H / CP)      only where CP > 0
price needed at volume Q  P_BE = [B + (H / Q)] / (1 − r)

Fixed monthly costs never enter the contribution margin. They are a separate bridge, because a fixed cost divided into a unit margin makes the unit margin depend on volume — which is exactly the confusion contribution margin exists to avoid. Break-even units are rounded upward because part of a unit cannot be sold, so the whole-unit figure usually leaves a small surplus rather than landing exactly on zero.

Where contribution per unit is zero or negative and fixed costs are positive, there is no break-even volume at all: each additional unit adds nothing to cover them. The tool reports that as a state rather than as a very large number of units.

What this tool does not decide

• Whether a price is competitive, acceptable to customers, or one that demand would survive. No demand, elasticity or conversion assumption exists anywhere in the model.
• Whether the business is profitable. The monthly figure is after the fixed costs you entered and nothing else, and it is not accounting profit, cash profit or net profit.
• Whether a margin is good. There is no benchmark, no score, no colour band and no industry figure in this tool, and none will be added without sourced, category-specific evidence.
• Anything about tax. VAT, sales tax and GST are entirely outside the model, as are discounts, returns, chargebacks and customer-acquisition cost.
• What any marketplace, payment provider or platform charges. The tool ships no fee presets and fetches no rates. Every percentage and every per-order amount is yours, which is why nothing on this page can go out of date.

Which of the three measures a figure refers to, and which costs it has already stopped counting, is explained in full in the companion article:Markup, gross margin and contribution margin explained.

Worked examples

Both examples below are produced by the same model this page runs, at build time. They use plain numbers with no currency symbol, name no marketplace or payment provider, and are not presented as typical of any business.

A 40% markup is not a 40% margin

A unit costs 40.00 and carries a 40.00% markup. Markup is measured on cost, so the price is 56.00 and the gross profit is 16.00. That same gross profit, divided by the price instead of by the cost, is a gross margin of28.57% — not 40.00%. Nothing has gone wrong: the two percentages describe the same money over two different denominators.

No selling fee or order cost was entered here, so the contribution margin is the same 28.57%. That equality is a fact about what was entered, not about the business.

The same 40% target, and two different prices

Now add a 5.00% revenue-based fee and a 0.30 fixed cost per order, with one unit per order. A seller who says “I want 40%” has not yet said which 40% they mean, and the two readings do not meet:

• As a gross-margin target, the price is 66.67. The gross margin is 40.00% exactly as asked — and after the fee and the order cost, the contribution margin is only 34.55%.
• As a contribution-margin target, the price is 73.27. The contribution margin is 40.00%, and the gross margin sits higher at 45.41%.

The gap between 66.67 and 73.27 is what a single undefined word costs. The naive shortcut for a target price — cost divided by one minus the target — produces the first figure. It is the right answer to the gross-margin question and the wrong answer to the contribution-margin one, because it leaves the percentage fee out of the denominator and the order cost out of the numerator.

Neither price is a recommendation. The model knows the costs entered and the target entered; it does not know what any customer would pay.