Introduction
“I added a 50% margin to my cost, but why isn’t my profit 50%?”
If you don’t know the answer to this question, you’re losing money on every sale.
Today, we’ll clear up the most common confusion among food business owners: the difference between margin and markup.
Let’s Start With Definitions
Profit Margin (Margin Rate)
Profit as a percentage of selling price
Margin = (Profit ÷ Selling Price) × 100Markup (Markup Rate)
Profit as a percentage of cost
Markup = (Profit ÷ Cost) × 100The key difference: It’s all about the denominator!
- Margin: denominator is the selling price
- Markup: denominator is the cost
Understanding With an Example
If a menu item costs $5 to make and sells for $10:
Margin Calculation
Profit = $10 - $5 = $5
Margin = ($5 ÷ $10) × 100 = 50%Markup Calculation
Profit = $10 - $5 = $5
Markup = ($5 ÷ $5) × 100 = 100%Same item, but 50% margin vs 100% markup!
Why Does This Matter?
The Common Mistake
Business owner: “I’ll add 50% to my cost”
Cost: $5
50% markup → Selling price: $7.50
Actual margin = ($2.50 ÷ $7.50) × 100 = 33%You thought you were making 50%, but you’re only making 33%.
Same Number, Different Results
| Target | Selling Price (on $5 cost) | Actual Profit |
|---|---|---|
| 50% markup | $7.50 | $2.50 (33% margin) |
| 50% margin | $10.00 | $5.00 (100% markup) |
If you wanted 50% margin but calculated 50% markup, you’re losing $2.50 per item!
Margin and Markup Conversion Table
No need to memorize—just reference this table:
| Margin | Markup | Selling Price (on $5 cost) |
|---|---|---|
| 20% | 25% | $6.25 |
| 25% | 33% | $6.67 |
| 30% | 43% | $7.14 |
| 33% | 50% | $7.50 |
| 40% | 67% | $8.33 |
| 50% | 100% | $10.00 |
| 60% | 150% | $12.50 |
| 70% | 233% | $16.67 |
The Formulas
Calculating Selling Price From Target Margin
Selling Price = Cost ÷ (1 - Margin)Example: Cost $5, target margin 40%
Selling Price = $5 ÷ (1 - 0.4) = $5 ÷ 0.6 = $8.33Calculating Selling Price From Target Markup
Selling Price = Cost × (1 + Markup)Example: Cost $5, target markup 50%
Selling Price = $5 × (1 + 0.5) = $5 × 1.5 = $7.50Real-World Example: Bakery Cake
Situation
- Cake cost: $30
- Goal: “I want to keep 50%“
The Mistake (Using Markup)
Selling Price = $30 × 1.5 = $45
Actual margin = $15 ÷ $45 = 33%The Correct Calculation (Using Margin)
Selling Price = $30 ÷ 0.5 = $60
Actual margin = $30 ÷ $60 = 50%$15 difference per cake! Sell 100 cakes a month, and that’s $1,500 in lost profit.
Which Should Food Businesses Use?
Industry Standard: Margin
In the food industry, when we talk about food cost percentage or profit percentage, we almost always mean margin (selling price basis).
When someone says “30% food cost”:
- Cost ÷ Selling Price = 30%
- If selling price is $10, cost is $3
Why Use Margin?
- Easier to manage expenses against revenue
- Industry benchmarks are margin-based
- Taxes and accounting are revenue-based
Quick Mental Math
Food Cost + Margin = 100%
Food Cost % + Profit Margin % = 100%If food cost is 35% → Margin is 65%
Quick Reference
| Food Cost | Margin | Meaning |
|---|---|---|
| 25% | 75% | Selling at 4× cost |
| 30% | 70% | Selling at 3.3× cost |
| 33% | 67% | Selling at 3× cost |
| 40% | 60% | Selling at 2.5× cost |
| 50% | 50% | Selling at 2× cost |
Practical Application: Building Your Price List
Step 1: Calculate Exact Costs
All ingredients + waste factor + packaging
Step 2: Set Target Margin
- Coffee shops: 70-75%
- Full-service restaurants: 60-70%
- Delivery-focused: 60-65%
Step 3: Calculate Selling Price
Selling Price = Cost ÷ (1 - Margin)Step 4: Compare to Market Prices
If your calculated price is too high:
- Look for cost reduction opportunities
- Adjust margin target
- Reconsider menu composition
Important: Margin ≠ Net Profit
A 70% margin doesn’t mean 70% goes into your pocket.
Selling Price: $10 (70% margin)
- Cost: $3
= Gross Profit: $7
From that $7, subtract:
- Labor
- Rent
- Utilities
- Taxes
- Other operating costs
= Net Profit (typically 20-30% of gross profit)70% margin → Net profit around 15-20% is the reality.
Summary
| Metric | Margin | Markup |
|---|---|---|
| Base | Selling Price | Cost |
| Formula | Profit ÷ Selling Price | Profit ÷ Cost |
| Industry Standard | ✅ Most common | △ Less common |
| Price Calculation | Cost ÷ (1-Margin) | Cost × (1+Markup) |
Key Takeaways
- Margin and markup are different
- The same “50%” gives very different prices
- Food industry uses margin (selling price basis)
- “Adding 50% to cost” = 50% markup = only 33% margin
Tired of pulling out the calculator every time you price a menu item? Enter your target margin and get the selling price instantly at the KitchenCost landing page — free to start.
Related Guides
- Understanding Food Cost Ratio — The foundation for setting target margins
- Prime Cost Guide — How margin fits into the bigger prime cost picture
- Menu Engineering Guide — Using margin data to optimize your menu mix
- Price Increase Timing Guide — When and how to adjust prices to protect margins
- Café Menu Cost Guide — Margin benchmarks for coffee shop pricing