Guides / Money
Markup is not margin
This is the most expensive arithmetic mistake in the trades, and it is expensive precisely because it is invisible: every individual job looks fine, the year just quietly comes in short. If you take one thing from this site, take this.
The two definitions
Markup is what you add to your cost. $1,000 of cost plus a 50 percent markup is a $1,500 price.
Margin is what you keep out of the price. On that $1,500 price you kept $500, which is 33.3 percent of the price — not 50.
Markup is profit divided by cost. Margin is profit divided by price. Same profit, different denominator, and the denominator is where the money goes.
What it costs
Suppose you decided you need a 40 percent margin, and you achieved it by adding 40 percent to cost. On $600,000 of annual direct cost you would quote $840,000 and keep $240,000 — a 28.6 percent margin.
The 40 percent margin you intended would have required quoting $1,000,000 and would have kept $400,000. The confusion cost $160,000 of gross profit on the same work, the same crew and the same year.
Nothing about any single job looks wrong. That is what makes it survive for years.
The formula that fixes it
To hit a target margin, divide your cost by (1 − margin). Not multiply by (1 + margin).
A 40 percent margin on $1,000 of cost: 1,000 ÷ 0.60 = $1,667. That is a 66.7 percent markup. For a 50 percent margin you need a 100 percent markup. For 33 percent, a 50 percent markup.
The markup vs margin calculator converts both ways and shows the markup a target margin requires.
A conversion table worth memorizing
- 20% markup → 16.7% margin
- 25% markup → 20% margin
- 33% markup → 25% margin
- 50% markup → 33.3% margin
- 67% markup → 40% margin
- 100% markup → 50% margin
- 150% markup → 60% margin
And gross margin is not profit
One more layer. A healthy gross margin still has to cover overhead before anything reaches you. If your overhead runs at 18 percent of revenue and your gross margin is 25 percent, your net is 7 percent — and one bad job takes the year.
Work out your overhead as a share of revenue, and treat gross margin as the number that has to cover it plus the profit you actually want. The hourly rate calculator starts from that end.
Questions
Is a 50% markup the same as a 50% margin?
No. A 50% markup gives a 33.3% margin. To get a 50% margin you need a 100% markup.
How do I calculate price from a target margin?
Divide cost by (1 − margin). A 40% margin on $1,000 of cost is 1,000 ÷ 0.60 = $1,667.
Which should I use when pricing?
Set the margin — it is the number that describes what you keep — then derive the markup from it. Setting a markup and hoping the margin follows is how the error happens.
Where this stops being arithmetic
Aerys prices a job from your own catalog and production rates, sends it with an accept link and the invoice already attached, and then compares what the job actually cost against what you quoted — by task, while the job is still running.