Profit Margin vs Markup: Formulas, Examples and Common Mistakes

Updated 27 September 2026 · 5 min read

Margin and markup both describe profit as a percentage, but they divide it by different numbers, so the same sale can show a 25% markup and a 20% margin. Mixing them up is one of the most common pricing mistakes in small businesses. Here are the formulas, a conversion table and worked examples in AED.

The two formulas

Start with profit, which is the same in both cases:

Profit = Selling price - Cost

Markup compares profit with what you paid:

Markup % = Profit ÷ Cost × 100

Margin (gross margin) compares profit with what you sold for:

Margin % = Profit ÷ Selling price × 100

Example: you buy a phone case for AED 40 and sell it for AED 50. Profit is AED 10. Markup is 10 ÷ 40 = 25%. Margin is 10 ÷ 50 = 20%. Same sale, two different percentages.

When you make a profit, the selling price is always bigger than the cost, so margin is always the smaller number. Margin can never reach 100%, because that would mean the item cost nothing, while markup can go well past 100%.

Converting between margin and markup

Work in decimals (25% = 0.25):

Margin = Markup ÷ (1 + Markup)

Markup = Margin ÷ (1 - Margin)

So a 25% markup is 0.25 ÷ 1.25 = 0.20, a 20% margin. A 40% margin needs a markup of 0.40 ÷ 0.60 = 0.667, or 66.7%.

Pricing for a target margin

If you know the margin you want, divide the cost by one minus that margin:

Selling price = Cost ÷ (1 - Target margin)

Example: a café's ingredients and packaging for one sandwich cost AED 12, and the owner wants a 60% gross margin. The price is 12 ÷ 0.40 = AED 30. Check: profit is AED 18, and 18 ÷ 30 = 60%.

The classic mistake is to apply the margin as if it were a markup: 12 × 1.60 = AED 19.20. That gives a profit of AED 7.20 and a margin of only 37.5%, well short of the target.

Going the other way is just as easy. If you know the markup you want, multiply: a 50% markup on an AED 12 cost is 12 × 1.50 = AED 18.

Keep VAT out of the calculation

If your business is VAT-registered in the UAE, the 5% VAT you charge customers isn't your money. You collect it and pay it to the Federal Tax Authority, and you can usually reclaim the VAT you paid your suppliers. So margin and markup should be worked out on prices excluding VAT.

Example: you sell a lamp for AED 210 including VAT, and your supplier charged you AED 120 plus VAT. The net selling price is 210 ÷ 1.05 = AED 200. Profit is 200 - 120 = AED 80, so the margin is 40% and the markup is 66.7%. If you had used the VAT-inclusive price, you'd get (210 - 120) ÷ 210 = 42.9%, which flatters the business by nearly three points.

If your business isn't VAT-registered, you can't reclaim the VAT on your purchases, so the VAT you pay suppliers is a real cost and belongs in the cost figure. Our UAE VAT guide shows how to strip VAT out of a price. For how VAT applies to your own business, check with the FTA or your accountant.

Common mistakes and pricing tips

• Quoting markup as margin. A supplier who says "we work on 50%" could mean either. A 50% markup is only a 33.3% margin, so ask which one they mean.
• Discounting without checking the margin. With a 25% markup, a 20% discount wipes out the whole profit: cost AED 100, price AED 125, and 20% off brings it back to AED 100.
• Leaving out costs. Delivery, card processing fees, packaging and marketplace commissions all eat into margin. Decide which costs you include and be consistent.
• Averaging percentages. The overall margin on two products isn't the average of their two margins unless their sales are equal. Add up total profit and total sales, then divide.
• Confusing gross and net margin. Gross margin covers the cost of the goods sold. Net margin also takes off rent, salaries and other overheads, so it's usually much lower.

Pricing tips

• Decide your target margin first, then work out the price, rather than picking a price and hoping.
• Round prices after the calculation (AED 29 or AED 30 rather than AED 29.43), then recheck the margin.
• Know your maximum discount. The largest discount you can give without making a loss equals your margin, so with a 40% margin, anything beyond 40% off loses money.
• Review costs regularly. If a supplier raises prices by 10% and you don't adjust, a 30% margin on an AED 100 item drops to 23%.

Working it out with our Profit Margin Calculator

Our Profit Margin Calculator takes a cost and a selling price and shows profit, margin and markup together, so you can see both percentages side by side. It runs in your browser.

1. Enter the cost, excluding VAT if you're VAT-registered.
2. Enter the selling price excluding VAT. If you only have the VAT-inclusive price, use the VAT Calculator first to extract the net amount.
3. Read off the profit, margin and markup.

It works from one cost and one price. It won't split out overheads or model discounts for you, so for those, try a few different selling prices and compare the results.

Frequently asked questions

Is a 25% markup the same as a 25% margin?

No. A 25% markup gives a 20% margin. To get a 25% margin you need a markup of 33.3%.

Which one should I use?

Margin is more common in financial reports and when comparing products, because it relates to revenue. Markup is handy for setting a price quickly from cost. Either works, as long as everyone knows which one you mean.

Should VAT be included when I calculate margin?

Not if you're VAT-registered. Use figures excluding VAT. If you're not registered, include the VAT you pay suppliers in your costs.

Can margin be more than 100%?

No. Margin always stays below 100%, while markup has no upper limit.