Ask someone to price a product at "50% above cost" and they'll usually add half the cost to itself. Ask them what profit margin that gives them, and a lot of people will also say 50%. It doesn't. Markup and margin are calculated from the same two numbers -- cost and selling price -- but they divide by different things, and the gap between them gets bigger the higher the numbers go.
The two formulas
Markup is profit as a percentage of cost:
Markup = (Selling Price - Cost) / Cost
Margin is profit as a percentage of selling price:
Margin = (Selling Price - Cost) / Selling Price
Same numerator, different denominator. That's the entire source of the confusion.
A concrete example
Say something costs you $50 to make and you sell it for $75. Your profit is $25.
Markup: $25 / $50 = 50%. You marked the price up by half the cost.
Margin: $25 / $75 = 33.3%. That $25 profit is only a third of what the customer actually paid.
Both numbers are correct. They're just answering different questions -- "how much did I add on top of cost" versus "what share of the sale price is profit."
Why this matters more at higher numbers
The gap between markup and margin grows as pricing gets more aggressive. A 100% markup (doubling your cost) sounds aggressive, but it's only a 50% margin. A 300% markup is only a 75% margin. People aiming for a specific margin target but pricing using markup math consistently underprice, because a markup percentage always looks bigger than the margin percentage it produces -- they're the same profit dollars, just measured against a smaller base (cost, instead of the larger selling price).
This isn't just semantics. If your business plan or investor deck says "we run on 40% margins" and someone on the pricing team applies a 40% markup instead, the actual margin comes out to about 28.6% -- a meaningfully different number that changes whether the business is profitable at the volumes you planned for.
Which one should you use?
Margin is generally the more useful number for understanding actual profitability, since it tells you what fraction of every sale you keep. Markup is more useful at the point of pricing, since you usually know your cost and are deciding how much to add to it. The trick is just being explicit -- and consistent -- about which one you're quoting, especially when comparing numbers across a team or against a target.
If you already know your cost and selling price, there's no need to do this arithmetic by hand or guess which formula applies. The Profit Margin Calculator works out both markup and margin from the same two inputs, so you can see exactly how far apart they are for your own numbers.