Profit Margin vs Markup: Price Your Products Right

By Neha·Published October 2, 2026

A gift shop owner buys scented candles at ₹200 each and sells them at ₹300. "Fifty percent profit," she tells her husband. Then Diwali comes and she runs a 30 percent off sale, reasoning that she will still keep 20 percent.

She sells more candles than ever. At the end of the month there is less money in the account than before the sale.

Nothing went missing. She confused two numbers that sound alike and are not: markup and margin. Understanding profit margin vs markup takes ten minutes and one worked example, and it is among the most valuable ten minutes a shopkeeper can spend. Let us follow her candles through.

Markup and margin: the same rupees, two different percentages

Both numbers describe the same ₹100 she earns on each candle. They differ in what they compare it to.

Markup compares the profit with the cost. It answers: how much did I add on top of what I paid?

Markup = profit ÷ cost. Here, ₹100 ÷ ₹200 = 50 percent.

Margin compares the profit with the selling price. It answers: out of every rupee the customer pays, how much do I keep?

Margin = profit ÷ selling price. Here, ₹100 ÷ ₹300 = 33.3 percent.

So her "fifty percent profit" is a 50 percent markup and only a 33 percent margin. Margin is always the smaller figure, because the selling price is always bigger than the cost.

This matters because discounts come off the selling price. A discount therefore eats margin, not markup. She thought she had 50 to play with. She had 33.

What the Diwali sale really did

At 30 percent off, the ₹300 candle sells for ₹210. Her cost is still ₹200. Profit per candle falls from ₹100 to ₹10.

She gave away 30 percent of the price and lost 90 percent of the profit.

To earn the same total profit as before, she would have had to sell ten times as many candles. She sold perhaps twice as many. Twice the work, twice the packing, a fifth of the money.

Here is how a discount multiplies the sales you need, at a 33 percent margin:

The lower your margin, the more savage this becomes. Before agreeing to any offer, work out how many extra sales it must bring just to stand still. The profit margin calculator shows your real profit on every sale, the right price with GST, and how many extra sales a discount needs.

A quick conversion table

Suppliers and distributors often talk in markup. Accountants and investors talk in margin. It helps to know both at a glance.

Notice that a markup of 100 percent, doubling the price, gives a margin of only 50 percent. And no markup, however large, ever takes margin to 100 percent, because that would mean the goods cost you nothing.

To set a price from a margin you want, divide instead of multiplying:

Selling price = cost ÷ (1 minus the margin)

For a 40 percent margin on a ₹200 candle: ₹200 ÷ 0.60 = ₹333. If she had simply added 40 percent to the cost, she would have charged ₹280 and ended up with a margin of under 29 percent. That gap, repeated across a whole shop, is the difference between a comfortable year and a tight one.

Gross margin is not what you take home

So far "cost" has meant only what she paid the supplier. That gives gross margin. The shop has other costs that the candle must also help pay for:

• Rent and electricity.
• Staff salaries.
• Packaging, carry bags and gift wrap.
• Delivery or courier charges.
• Card machine, payment gateway and marketplace fees.
• Breakage, expiry and items that never sell.
• Advertising.
• Loan interest.

What remains after all of these is net profit, and net margin is that amount as a share of sales. A gift shop with a 33 percent gross margin might be left with 8 to 12 percent net. A grocery store working on thin gross margins may keep only a few percent and survive on volume.

That is why a markup that sounds generous can still lose money. If your overheads eat 25 percent of sales, a product with a 20 percent margin loses you money every time it is sold, however briskly it moves.

A rough way to find your own number: add up one month of all expenses other than stock, and divide by that month's sales. If the answer is 22 percent, every product needs a gross margin comfortably above 22 percent before it earns anything.

Where GST fits

GST confuses margin calculations more than anything else, so keep one rule in mind: GST is not your income. Work out margin on prices before GST.

If you are registered for GST, the tax you collect from customers is passed on to the government, less the tax you paid on your purchases. It flows through you. So compare the cost before GST with the selling price before GST.

Suppose the candle costs ₹200 plus GST, and she wants to sell at ₹300 plus GST. Her margin is still ₹100 on ₹300, or 33 percent. The customer pays more than ₹300 at the till, and the extra is not hers.

The common mistake is to treat a GST-inclusive selling price as if all of it were revenue. If ₹300 is the price the customer pays including tax, the real selling price is lower, and so is the margin. With an 18 percent rate, a ₹300 inclusive price means about ₹254 before tax, which leaves ₹54 on a ₹200 cost: a 21 percent margin, not 33.

If you are not registered for GST, you cannot claim back the tax paid on purchases. Your true cost is then the full amount you paid the supplier, tax included.

Rates and rules differ by product and change over time, so confirm yours with your accountant. For billing itself, the GST invoice and quotation maker works out CGST and SGST or IGST for you, and our guide to the GST invoice format explains the fields.

Five ways to improve margin without raising every price

1. Know your margin per product. Most shops have a few items that earn well and many that barely pay for their shelf space. List your twenty best sellers with cost, price and margin. The result is usually a surprise.
2. Raise prices selectively. Customers remember the price of milk and bread. They do not remember the price of a gift bag or a phone cover. Small rises on items nobody compares go unnoticed.
3. Bundle instead of discounting. "Three candles and a holder for ₹999" protects margin better than 20 percent off, because you add a low-cost item instead of cutting the price.
4. Give value, not rupees. Free gift wrapping or free local delivery above a certain bill costs you less than a percentage discount and often feels like more.
5. Collect what you are owed. Margin on paper is not money in the bank. An unpaid invoice has a margin of zero. The payment reminder writer drafts polite WhatsApp and email reminders, and a UPI QR code on your counter and bills makes paying quick.

Frequently asked questions

What is the difference between margin and markup in simple words?

Both measure the same profit. Markup is that profit as a percentage of what the item cost you. Margin is the same profit as a percentage of what you sold it for. Margin is always the lower number.

What is a good profit margin for a small business in India?

It varies widely by trade. Grocery and electronics work on thin margins and high volume, while clothing, gifts, food service and professional services usually have higher gross margins. A good margin is one that covers your overheads and still leaves a net profit you can live on.

How do I calculate selling price from cost and margin?

Divide the cost by one minus the margin. For a 25 percent margin on an item costing ₹600, divide 600 by 0.75, which gives ₹800. Adding 25 percent to the cost would give only ₹750.

Should GST be included when calculating profit margin?

No, if you are registered for GST. Use the cost and the selling price before tax, since the tax you collect is paid over to the government. If you are not registered, treat the GST you paid on purchases as part of your cost.