Markup vs Margin: The Difference That Could Save Your Business

The Expensive Mistake

Here's a scenario that plays out every day:

Contractor: "I mark up my materials 30%, so I'm making 30% profit."

Reality: That contractor is actually making 23% margin.

On a $10,000 job, that's the difference between $3,000 and $2,300 in gross profit. Over a year of $500,000 in revenue, that misunderstanding costs $35,000.

Let's clear this up once and for all.

Markup vs. Margin Defined

Markup

Markup is the percentage added TO your cost to get the selling price.

Formula: Selling Price = Cost × (1 + Markup%)

Example: $100 cost with 30% markup $100 × 1.30 = $130 selling price

Margin

Margin is the percentage of the selling price that is profit.

Formula: Margin = (Selling Price - Cost) / Selling Price

Example: $130 selling price, $100 cost ($130 - $100) / $130 = 23% margin

The Key Insight

30% markup ≠ 30% margin

In the example above:

• Markup: 30%
• Margin: 23%

They're related but different. And confusing them will hurt your profits.

Markup to Margin Conversion Table

| Markup | Actual Margin | |--------|--------------| | 10% | 9.1% | | 15% | 13.0% | | 20% | 16.7% | | 25% | 20.0% | | 30% | 23.1% | | 35% | 25.9% | | 40% | 28.6% | | 50% | 33.3% | | 75% | 42.9% | | 100% | 50.0% |

Notice: You need a 100% markup to achieve a 50% margin.

Margin to Markup Conversion

What markup do you need for a specific margin?

Formula: Markup = Margin / (1 - Margin)

| Desired Margin | Required Markup | |----------------|-----------------| | 10% | 11.1% | | 15% | 17.6% | | 20% | 25.0% | | 25% | 33.3% | | 30% | 42.9% | | 35% | 53.8% | | 40% | 66.7% | | 50% | 100.0% |

Want a 30% margin? You need a 43% markup, not 30%.

Real-World Example

Let's price a water heater installation:

Costs:

• Water heater: $500
• Materials: $100
• Labor (3 hours × $50): $150
• Total Cost: $750

Pricing with 30% Markup: $750 × 1.30 = $975 selling price Margin: ($975 - $750) / $975 = 23% margin

Pricing for 30% Margin: Selling Price = Cost / (1 - Margin) $750 / (1 - 0.30) = $750 / 0.70 = $1,071 selling price

That's a $96 difference PER JOB from understanding the math correctly.

Which Should You Use?

Use Markup When:

• Calculating prices from costs (most common for contractors)
• Your industry uses markup language
• Comparing to competitor pricing on materials

Use Margin When:

• Analyzing profitability
• Talking to accountants or investors
• Setting profit targets

Our Recommendation:

Think in margins, price with markup.

Decide what margin you need (usually 30-40% gross margin minimum), then calculate the required markup.

Common Mistakes

Mistake 1: Inconsistent Application

Marking up materials at 30% but forgetting to markup labor. Apply your markup to ALL costs.

Mistake 2: Markup on Cost, Not Selling Price

Some contractors accidentally calculate markup on the selling price, which gives a completely wrong number.

Mistake 3: Not Including All Costs

If you markup materials but forget overhead allocation, your "30% margin" is actually much lower.

Quick Reference Formulas

Cost to Selling Price (using markup): Selling Price = Cost × (1 + Markup%)

Selling Price to Cost (using margin): Cost = Selling Price × (1 - Margin%)

Margin from Markup: Margin = Markup / (1 + Markup)

Markup from Margin: Markup = Margin / (1 - Margin)

Key Takeaways

1. Markup and margin are NOT the same thing
2. 30% markup = 23% margin (not 30%)
3. You need 100% markup to achieve 50% margin
4. Decide your target margin, then calculate required markup
5. Apply markup to ALL costs, not just materials

EstimateBuilderPro Does the Math

Our software handles markup/margin calculations automatically:

• Set your target margin
• See the required markup
• Apply consistently across all estimates
• Track actual margins vs. targets

Start your free trial and price for profit.