Two words, two directions
Markup is a percentage added on top of cost. Margin is the share of the selling price that is profit. Markup looks up from cost; margin looks down from price. Because price is bigger than cost, the same dollars are a smaller percentage of price than of cost.
To actually keep 30%: price = $1,000 ÷ (1 − 0.30) = $1,429.
The conversion table
| You add this markup | You actually earn this margin | To earn that as a margin, add this markup |
|---|---|---|
| 10% | 9.1% | 11.1% |
| 20% | 16.7% | 25% |
| 25% | 20% | 33.3% |
| 30% | 23.1% | 42.9% |
| 40% | 28.6% | 66.7% |
| 50% | 33.3% | 100% |
Read the middle column. A 30% markup, the most common number in the trades, earns a 23% margin. Over $300,000 of annual revenue, that is $21,000 you thought you were making and were not.
Why margin is the number that matters
Everything downstream is expressed as a share of revenue. Your accountant reports net margin. Your bank looks at margin. When you ask "can I afford a second truck," the answer is a margin question. Markup is only useful as a shortcut for arithmetic, and it is a shortcut that lies.
The formula to price from cost
30% margin: divide by 0.70. 25%: divide by 0.75. 20%: divide by 0.80. Put the division in your calculator or spreadsheet once and never add a percentage to cost again.
Where cost has to include overhead
Margin on direct cost is not margin. If you divide labor and materials by 0.70 and forget the $6,500 a month of insurance, yard and software, your "30% margin" is closer to 10% net. Spread overhead onto every billable hour first, then apply the margin. Every calculator on this site does it in that order.
Quick checks
- If your pricing sheet says "add X%," you are using markup. Convert it with the table.
- If your year-end net profit is consistently lower than the percentage you "add," this is why.
- A quote at exactly cost is a 0% margin and a 0% markup. Both formulas agree only there.