Margin vs markup: why 30% isn't always 30%
You add 30% to your cost and think you keep 30%? You keep 23%. Here is the difference, and the one formula that fixes it.
Many small food producers price like this: cost plus 30%. It feels like a 30% margin. It isn't, and across hundreds of sales the gap starts to hurt.
Markup and margin are two different numbers
Markup is measured against cost. Margin is measured against price.
- Markup = profit ÷ cost
- Margin = profit ÷ price
The same pound of profit gives a different percentage depending on what you divide it by.
Example: granola in bags
A bag of granola costs you £5: oats, nuts, honey, the bag, the label and your time.
You add a 30% markup: £5 × 1.3 = £6.50. Profit is £1.50. Margin: 1.50 ÷ 6.50 = 23%.
The goal was 30%, and you get 23%. At 200 bags a month, that is £140 missing.
The formula for a target margin
Price = cost ÷ (1 − margin)
£5 ÷ (1 − 0.30) = £7.14. Round up to £7.20. Your margin is then 31%.
Conversion table
| Margin you want | Markup you need | |---|---| | 20% | 25% | | 25% | 33% | | 30% | 43% | | 40% | 67% | | 50% | 100% |
Margin can never pass 100%. Markup can.
Which number to use
Margin tells you how much of every pound you take stays with you. Use it to set prices and to compare products. Markup is handy for quick sums from cost, as long as you know which markup gives the margin you want.
Shops and cafés that resell your product usually talk about their margin too. Before you agree to a discount, ask whether they mean margin on price.
Three common mistakes
- Cost without labour. Leave out your hours and the margin is fiction. Our guide on pricing a custom cake shows how to include them.
- Old ingredient prices. Butter went up, the price list didn't. A weekly shopping list with current prices helps.
- One margin for everything, never checked. A jar of sauce, a bag of granola and a catering job carry different costs and different risks.
How Lagom does it
In Lagom you enter ingredients at your own prices, packaging and labour. You set a target margin, and Lagom gives you the price and shows margin, not markup. When an ingredient gets dearer, prices update, and products below your target get a clear suggestion such as "Raise from £6.50 to £7.20 to keep 30%". The decision stays with you.