What are the formulas?
Both start with the same profit: selling price minus cost. They divide by different numbers. Markup divides by cost. Margin divides by price.
Markup % = (price - cost) / cost x 100. Margin % = (price - cost) / price x 100. To convert, margin = markup / (1 + markup), and markup = margin / (1 - margin).
How do the two compare?
Because price is larger than cost, margin is always the smaller number. Reference points:
- 25 percent markup = 20 percent margin
- 33.3 percent markup = 25 percent margin
- 42.9 percent markup = 30 percent margin
- 50 percent markup = 33.3 percent margin
- 100 percent markup = 50 percent margin
What does a worked example look like?
A job at 1418 Ridge Rd costs $4,000 in materials and labor.
At a 30 percent markup: $4,000 x 1.30 = $5,200. Profit is $1,200, and margin is $1,200 / $5,200 = 23.1 percent.
To earn a 30 percent margin: $4,000 / (1 - 0.30) = $5,714.29. Profit is $1,714.29. The markup behind it is $1,714.29 / $4,000 = 42.9 percent.
The difference is $5,714.29 - $5,200 = $514.29 on one job. Spread across a year of jobs, that gap decides whether overhead gets covered.
Which should you use to price work?
Use margin as your target, because overhead and profit goals are normally stated as a share of revenue. Overhead of 25 percent of sales and net profit of 10 percent mean you need at least a 35 percent gross margin, and you reach it by dividing cost by 0.65, not by multiplying by 1.35.
Markup is still useful as the number a crew or estimator applies in a pricebook. Just derive it from the margin you need.
How do you set a markup in a pricebook?
Start from the margin you need, then convert once and store the markup. If you need a 35 percent margin, the markup is 0.35 / 0.65 = 53.8 percent. A part that costs $18.00 then sells for $18.00 x 1.5385 = $27.69, and the profit of $9.69 is 35.0 percent of $27.69.
Check the math both ways before you publish the pricebook. Take one item, apply the markup, then divide profit by price. If you do not get your target margin, the formula in the pricebook is wrong.
Review the target whenever overhead changes, such as a new truck, a rent increase or an insurance renewal. A margin that covered costs last year may not cover them now.
What mistakes do contractors make?
The most common mistake is aiming for a margin and applying that percent as a markup, which leaves the shop short. Another is applying margin to labor and markup to materials in the same estimate without noticing. Pick one method, write the target on your pricebook, and check actual job margins against it after close-out.
Sources: Groundplan: Markup vs Margin