Markup vs margin
Both measure the same profit. Markup divides it by your cost, margin divides it by the price the customer pays.
The two formulas
Markup = Profit ÷ Cost
Margin = Profit ÷ Price
Profit is the same number in both: price minus cost. Because the price is always larger than the cost when you make money, the margin is always the smaller percentage.
A contractor example
You price a bathroom tile job. Tile, thinset, grout and backer board cost you $1,800. Your labor costs you $1,200. Total cost: $3,000.
You charge $4,000. Profit: $1,000.
| Markup | $1,000 ÷ $3,000 = 33.3% |
| Margin | $1,000 ÷ $4,000 = 25% |
Why the difference costs money
Say you want to keep 25% of every job as profit, and you mark up your costs by 25%. On the $3,000 job you charge $3,750 and make $750. Your margin is 20%, not 25%. You left $250 on the table.
To keep a 25% margin, mark up by 33.3%.
Converting between them
Markup = Margin ÷ (1 − Margin)
Margin = Markup ÷ (1 + Markup)
| Markup | Margin |
|---|---|
| 10% | 9.1% |
| 20% | 16.7% |
| 25% | 20% |
| 33.3% | 25% |
| 50% | 33.3% |
| 66.7% | 40% |
| 100% | 50% |
Which one to use
Use markup when you build a price from your costs: it is the number you multiply by. Use margin when you check whether a job, or your whole year, made enough money: it tells you what share of every dollar you collected you kept.
Your overhead (truck, insurance, phone, tools, the hours you spend quoting) is paid out of the margin. If your overhead runs 15% of sales and your margin is 20%, 5% is left as profit.