Markup vs margin: the difference that decides whether a job makes money

Markup is your profit as a percentage of what the job cost you. Margin is your profit as a percentage of what you charged. A part that costs 100 and sells for 150 has a 50% markup but a 33.3% margin: the profit is 50 either way, but it is divided by a different number.

The two formulas

• Markup = (price − cost) ÷ cost.
• Margin = (price − cost) ÷ price.
• Price from a markup: cost × (1 + markup).
• Price from a margin: cost ÷ (1 − margin).

Converting one to the other

• Margin = markup ÷ (1 + markup). A 50% markup is 0.5 ÷ 1.5 = 33.3% margin.
• Markup = margin ÷ (1 − margin). A 25% margin is 0.25 ÷ 0.75 = 33.3% markup.

Common markups and the margin they give

• 20% markup gives a 16.7% margin.
• 25% markup gives a 20% margin.
• 33.3% markup gives a 25% margin.
• 50% markup gives a 33.3% margin.
• 100% markup gives a 50% margin.

Margin can never reach 100%, because profit can never be more than the whole price. Markup has no ceiling: a part that costs 10 and sells for 40 has a 300% markup and a 75% margin.

The mistake that costs money

Suppose you have worked out that you need a 30% margin to cover overheads and pay yourself. If you add 30% to your costs, you have applied a 30% markup, which is only a 23.1% margin. On a job that cost 1,000 you charge 1,300 instead of 1,428.57, and the missing 128.57 comes straight out of profit. Across a year of quotes, that gap is often the difference between a business that grows and one that is always busy but short of cash.

Which one should you use?

Use whichever you like to set prices, as long as you know which one you are using. Margin is the one to watch in your accounts, because it tells you how much of every sale you keep. Markup is often easier on parts, where you know the cost and add a fixed percentage.

Work it out without the arithmetic

The profit margin calculator reads both off a cost and a price. The markup calculator and margin calculator convert either way, and the job profit calculator checks a whole job once you know its costs.