Margin, Markup, or Profit? How not to fool yourself when counting money

In this example, two different metrics are being confused — markup and margin. The markup is indeed 100%, but the margin is only 50%. When management decisions are made based on a supposed “100% margin,” cash gaps, debt, and the feeling that “we seem to be earning money, but there’s none left” appear very quickly.

The goal of this article is simple: to clearly break down margin, markup, gross profit, and net profit, explain the logic behind the calculations, and show why confusing these concepts is dangerous for a business.

This is a common source of financial misunderstanding in small businesses. Although markup and margin measure the same spread between cost and price, they do so from different viewpoints, leading to confusion and significantly different percentage results.

Markup is the amount added to the cost to determine the selling price.

Markup formula: (Selling price − Cost) / Cost × 100%

Example:
Purchase at 100 USD, sale at 200 USD.
Markup = (200 − 100) / 100 × 100% = 100%.
In other words, the selling price is twice the cost.

Margin is the share of profit in revenue. It shows how many units of profit are embedded in each unit of sales.

Margin formula: (Selling price − Cost) / Selling price × 100%

Using the same example:
Purchase at 100 USD, sale at 200 USD.
Margin = (200 − 100) / 200 × 100% = 50%.
Here it becomes clear that half of the revenue covers costs, while the other half is gross profit.

The same amount of money produces different percentages depending on whether you use cost or selling price as the base. The key rule is: markup can be as high as 300%, but margin can never exceed 99.9% unless cost is zero. It is the margin that reflects the real profitability of sales, which is then used to calculate overall business profitability and the break-even point.

Once you’ve understood margin and markup, it’s time to move on to profit. There are also two important categories — gross profit and net profit . They appear in the P&L report (Profit & Loss statement) and reflect different levels of financial results.

Gross profit is revenue minus the cost of goods or services sold. These are the funds available to cover all other business expenses: rent, salaries, marketing, logistics, taxes. Gross profit depends directly on margin: the higher the margin, the more resources are available for operational expenses and business growth.

Net profit is what remains after paying everything: taxes, rent, team salaries, internet, advertising, loan servicing. Net profit represents the “owner’s money,” not revenue or gross profit. In the P&L statement, it appears on the final line and shows the real profitability of the business.

This is where a common illusion of wealth comes from. For example, in a coffee shop, the margin on coffee may reach 70%, making the gross profit look impressive. But when you account for downtown rent, salaries, taxes, and marketing campaigns, the net profit can be close to zero or even negative. The business may seem “high-margin,” but it is still far from the break-even point.

Without regular analysis of margin, gross profit, and net profit, it’s impossible to properly evaluate profitability, the break-even point, or make informed decisions — whether raising prices, changing the product mix, or optimizing expenses.

Discounts may seem like a simple tool: slightly reduce profit, and revenue grows. In practice, it’s more complicated. This is where confusing markup and margin can turn directly into losses.

A classic scenario: an entrepreneur works with a 30% markup and believes there is a “safety cushion.” A client requests a 25% discount, and the entrepreneur thinks: “No problem, I’ll still be up 5%.” But this logic is flawed because discounts eat into margin, not markup.

Let’s break it down with numbers: Cost = 100 USD Markup 30% → Selling price = 130 USD Margin = (130 − 100) / 130 × 100% ≈ 23.1%

Now the entrepreneur gives a 25% discount on the selling price: New price = 130 × 0.75 = 97.5 USD

The result: 97.5 USD < 100 USD cost. Formally, the sale happens, revenue exists, and the client is satisfied. But each such transaction generates a direct loss. On the P&L statement, this quickly turns into negative net profit, even if turnover increases.

Therefore, it’s important to remember a simple principle: any discount reduces a portion of your margin. Before agreeing to a “10% off for an important client,” check how much margin it consumes and whether the business still stays at least at the break-even point.

When there are only a few deals, all sales numbers can still be kept in your head or in a couple of Excel files. But once multiple sales channels appear, along with different types of clients, discounts, payment terms, and bonus programs, manual tracking starts to “break down.” Formulas fail, files get duplicated, versions get mixed up — and it becomes difficult to know exactly who sold what, for how much, and which channels are actually driving sales forward.

CRM plays a key role in managing daily sales activities. It records deals, stages in the sales funnel, agreed prices, discounts, payment methods, and tracks client communications. On this basis, reports can be built for plan fulfillment, stage-to-stage conversion, average check, repeat sales, and performance of individual managers and channels. This is exactly what a sales manager needs daily: a quick view of where deals are “stuck,” where conversion drops, and which managers are really driving the team.

Comprehensive management accounting usually lives in separate systems — ERP or specialized financial services. These systems account for expenses, salaries, taxes, rent, generate company-level reports, evaluate profitability, and assess the overall financial situation. The most effective model is one where CRM focuses on sales, while management systems handle calculations and performance analysis. It’s critically important that sales data isn’t entered manually a second time, but is automatically pulled from the CRM — this ensures there is no gap between what the sales team sees and what the accountant or owner sees.

Uspacy, as a comprehensive business management tool and no-code platform, allows this connection to be built without unnecessary technical complexity. The sales team works in a user-friendly CRM: managing deals, tracking statuses, recording agreements and payments, and reviewing funnel and performance reports. Through no-code scenarios and integrations, data from Uspacy is then transmitted to accounting and financial systems for in-depth analysis. In the end, managers have a convenient tool to work with clients, while the owner gets a complete, accurate view of sales and numbers — without manually transferring data between systems.