Markup vs Margin — The Difference That Costs You Money

A contractor charges 20 per cent over cost and assumes they are making a 20 per cent profit margin. They are making 16.7 per cent. Over a year of jobs that gap is the difference between a business that grows and one that quietly runs out of cash. Markup and margin are not the same number, and confusing them is the most expensive arithmetic mistake in small business pricing.

The two definitions

Markup is measured against your cost. It answers: how much did I add on top of what I paid? If a part costs $100 and you sell it for $120, the markup is $20 on a $100 cost, which is 20 per cent.

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Margin is measured against your price. It answers: of the money the customer handed me, how much did I keep? Same job: you kept $20 out of $120, which is 16.7 per cent.

Same transaction, same dollars, two different percentages — because the denominator changed. Markup divides by cost. Margin divides by revenue. Revenue is always the bigger number, so margin is always the smaller percentage.

The conversion table worth memorising

15% markup = 13.0% margin
20% markup = 16.7% margin
25% markup = 20.0% margin
33% markup = 25.0% margin
50% markup = 33.3% margin
67% markup = 40.0% margin
100% markup = 50.0% margin

The formulas: margin = markup ÷ (1 + markup). Markup = margin ÷ (1 − margin). If you want to work backwards from a target margin, that second formula is the one you need — and it is the one almost nobody uses.

Why this quietly destroys profitability

The damage is not the single job. It is that the error compounds across every quote, and it always errs in the same direction — you are always making less than you think. A shop targeting a 30 per cent margin but applying a 30 per cent markup is actually running at 23 per cent. On $400,000 of annual revenue, that is $28,000 of profit that was budgeted for and never arrived.

It also breaks your break-even maths. If your fixed costs were covered on the assumption of 30 per cent contribution and you are actually contributing 23, you need materially more volume than you planned to reach the same profit. Most owners discover this at the end of the year rather than the start.

How to price from the margin you actually want

Start from the margin, not the markup. Decide what percentage of revenue you need to keep, then divide cost by (1 − margin) to get the price. Want 30 per cent margin on a job costing $1,000? Divide 1,000 by 0.70 to get $1,428.57. That is a 42.9 per cent markup — considerably more than the 30 per cent most people would have added.

Run the numbers with the contractor markup calculator, which converts between the two directly, and check the volume you need with the break-even point calculator. For job-level costing, the job costing calculator builds the cost base you are marking up in the first place, and you can bill the finished work with the free invoice generator.

The one sentence to remember

Markup is what you add; margin is what you keep. If someone quotes you a percentage and does not say which one they mean, assume it is markup and that the real margin is lower.