Pricing
Markup vs margin: the mistake that eats contractor profit
Quick answer
Markup is profit divided by cost; margin is profit divided by price. Adding 20% to cost gives only a 16.7% margin. To keep a target margin, divide your total cost by one minus the margin: $800 ÷ 0.80 = $1,000 for 20%.
Say you decide that every job should make 25 percent. You add up your costs, add 25 percent on top, send the quote and win the job. At the end of the year the accounts show a profit of 20 percent, not 25. Nobody stole anything and nothing went wrong on site. You just used markup when you meant margin.
The two words get used as if they meant the same thing. They do not, and the gap between them grows fast as the numbers get bigger.
The difference in one sentence
Markup is a percentage of your cost. Margin is a percentage of your price.
| Formula | Example with $800 cost and $1,000 price | |
|---|---|---|
| Markup | (price − cost) ÷ cost | $200 ÷ $800 = 25 % |
| Margin | (price − cost) ÷ price | $200 ÷ $1,000 = 20 % |
Same job, same $200 of profit, two different percentages. Neither is wrong. The problem starts when you set a target in one and calculate it in the other.
Why it matters when you quote
When you plan your business, you think in margin: "I want to keep 20 cents of every dollar a customer pays me." That is the number that shows up in your accounts, because your accounts are measured against revenue.
When you build a quote, it feels natural to start from cost and add a percentage. If that percentage is the margin you wanted, you always end up short:
- $800 of cost plus 20 percent is $960. The profit is $160, which is 16.7 percent of the price.
- To really keep 20 percent, the price must be $800 ÷ 0.80 = $1,000.
On one job the difference is $40. On a year of jobs it can be the difference between a business that grows and one that just keeps busy.
The conversion table
If you think in margin but like to calculate with markup, use the markup that matches the margin you want.
| Margin you want to keep | Markup to add to cost |
|---|---|
| 10 % | 11.1 % |
| 15 % | 17.6 % |
| 20 % | 25.0 % |
| 25 % | 33.3 % |
| 30 % | 42.9 % |
| 35 % | 53.8 % |
| 40 % | 66.7 % |
| 50 % | 100 % |
The formulas behind the table, if you want other numbers:
- Markup needed = margin ÷ (1 − margin). For a 30 percent margin: 0.30 ÷ 0.70 = 0.429, so 42.9 percent.
- Margin you actually get = markup ÷ (1 + markup). A 50 percent markup gives 0.50 ÷ 1.50 = 0.333, a 33.3 percent margin.
The simplest way to quote with a margin
Skip the conversion. Divide your total cost by one minus the margin you want:
Price = total cost ÷ (1 − margin)
For a 25 percent margin on $1,200 of cost: $1,200 ÷ 0.75 = $1,600. Check it: $400 of profit on a $1,600 price is exactly 25 percent. The complete pricing guide uses this formula in a full worked example, and the job price calculator applies it automatically.
Where markup still makes sense: materials
Many trade businesses add a markup on materials and put their margin on labor. That is fine, as long as you know what the markup does to the whole job.
Picture a paint job with $300 of materials. A 20 percent markup on those materials adds $60. That $60 pays for the time spent buying and hauling the paint, the leftovers you cannot return and the money you spend weeks before the customer pays you. It is not the job's profit. The job's profit is what is left after labor, materials, overhead and your own wage, measured against the final price.
The mistake at a bigger scale
The gap between the two numbers gets wider as percentages rise. If you add 50 percent to cost thinking you will keep half of the price, you keep a third. On a job that costs $6,000:
| Price | Profit | Share of the price | |
|---|---|---|---|
| 50 % markup | $9,000 | $3,000 | 33.3 % |
| 50 % margin | $12,000 | $6,000 | 50 % |
The difference is $3,000 on a single job. If your target really is 50 percent, the quote has to be $12,000.
How to use this in your next quote
- Add up all the costs: labor, including hidden hours; materials; and the job's share of overhead.
- Decide the margin you want to keep, as a share of the price.
- Divide the total cost by one minus that margin.
- Round to a clean number and check the profit as a share of the final price.
If you quote painting jobs, the same steps appear in how to price and bid a paint job. If you charge by the hour, see how to set a handyman hourly rate, where the margin goes into the rate itself.
Frequently asked questions
Is a 25% markup the same as a 25% margin?
No. A 25% markup on cost gives a 20% margin on the price. To get a 25% margin you need a markup of about 33.3%.
Which one should I use to set prices?
Set your target as a margin, because that is what your accounts measure, and calculate the price by dividing total cost by one minus that margin.
Can a margin be over 100%?
No. Margin is a share of the price, so it is always below 100%. Markup can be over 100%, because it is measured against cost.