A 40% markup does not equal a 40% profit margin. This confusion is remarkably common — and remarkably expensive. Business owners set prices based on markup, calculate expected margins, and are consistently surprised when profits do not match expectations. Here is the math that clarifies everything.

Markup: Calculated on Cost

Markup = (Selling Price – Cost) / Cost x 100

You buy a product for $25 and sell it for $35. Markup = ($35 – $25) / $25 x 100 = 40%.

Gross Profit Margin: Calculated on Revenue

Gross Margin = (Selling Price – Cost) / Selling Price x 100

Same scenario: ($35 – $25) / $35 x 100 = 28.6%.

The profit is the same $10 — but markup says 40% and margin says 28.6%. Both are correct. They just measure different things.

The Conversion Formulas

Markup to Margin: Margin = Markup / (1 + Markup)

Margin to Markup: Markup = Margin / (1 – Margin)

Common conversions:

• 25% markup = 20% margin
• 33% markup = 25% margin
• 50% markup = 33.3% margin
• 100% markup = 50% margin

Which Should You Use for Pricing?

Markup is easier to calculate quickly from costs. It answers: how much do I add to my cost to get a price? Margin is more useful for comparing profitability across products and against industry benchmarks (which are almost always expressed as margins, not markups).

For Etsy digital products: you have effectively zero cost per unit once the product is created. Your cost is the time to create it, amortized across all expected sales. A template that took 10 hours to create, priced at $9.99, selling 50 copies = $499.50 revenue. At Etsy fees of roughly 15%, net is about $424. If your 10 hours are worth $20/hour ($200), your gross margin after cost recovery is ($424 – $200) / $424 = 52.8%.

Pricing to Target Margin

Formula: Selling Price = Cost / (1 – Target Margin)

To achieve a 60% gross margin on a $25 cost: $25 / (1 – 0.60) = $25 / 0.40 = $62.50 selling price.