Markup vs margin and the profit you really keep
Markup measures profit against cost, margin against price. So a 25% markup is only a 20% margin, and that gap can quietly eat your profit on every quote.
- Both formulas on one short sheet
- Conversion tables from markup to margin and back
- How to work back from the margin you want
By WhizQuote Editorial · 7 minute read
Markup is profit as a percentage of cost; margin is profit as a percentage of the selling price. On a job that costs $2,000 and sells for $2,500, the $500 profit is a 25% markup but only a 20% margin. To hit a target margin, divide the cost by 1 minus the margin instead of multiplying by 1 plus it.
Markup and margin, defined
Markup is profit expressed as a percentage of what the job cost you. Margin is the same profit expressed as a percentage of what the customer pays. Price is always larger than cost, so for the same dollars of profit the margin percentage is always the smaller of the two numbers.
- Job cost
- $2,000
- Selling price
- $2,500
- Profit
- $500
- Markup
- $500 ÷ $2,000 = 25%
- Margin
- $500 ÷ $2,500 = 20%
Neither figure is wrong; they answer different questions. Markup tells you how much to add on top of a cost. Margin tells you how much of each sales dollar you keep, which is the figure your accountant reports and the one your profit targets should use.
The markup vs margin formula sheet
Six formulas cover every conversion a quote will need. Each is worked below on an $800 cost that sells for $1,000, so you can check them on a phone calculator in seconds. Inside the sums, write percentages as decimals: 25% is 0.25 and 20% is 0.20.
| To find | Formula | Worked on an $800 cost |
|---|---|---|
| Markup | (price minus cost) ÷ cost | ($1,000 minus $800) ÷ $800 = 25% |
| Margin | (price minus cost) ÷ price | ($1,000 minus $800) ÷ $1,000 = 20% |
| Price from a markup | cost × (1 + markup) | $800 × 1.25 = $1,000 |
| Price from a margin | cost ÷ (1 minus margin) | $800 ÷ 0.80 = $1,000 |
| Margin from a markup | markup ÷ (1 + markup) | 0.25 ÷ 1.25 = 0.20, so 20% |
| Markup from a margin | margin ÷ (1 minus margin) | 0.20 ÷ 0.80 = 0.25, so 25% |
The fourth row is the one to remember. To reach a target margin, divide by 1 minus the margin; never multiply by 1 plus it. If you would rather not do it by hand, the markup and margin calculator takes a cost with a markup, a margin or a selling price and shows all four results.
Markup to margin conversion table
Read across from a markup to the margin it really produces, with the price and profit on a $2,000 job cost. The gap between the two percentages grows as they rise: a 100% markup, which doubles your cost, is still only a 50% margin.
| Markup | Margin | Price on a $2,000 cost | Profit |
|---|---|---|---|
| 10% | 9.09% | $2,200 | $200 |
| 15% | 13.04% | $2,300 | $300 |
| 20% | 16.67% | $2,400 | $400 |
| 25% | 20.00% | $2,500 | $500 |
| 30% | 23.08% | $2,600 | $600 |
| 40% | 28.57% | $2,800 | $800 |
| 50% | 33.33% | $3,000 | $1,000 |
| 75% | 42.86% | $3,500 | $1,500 |
| 100% | 50.00% | $4,000 | $2,000 |
Working backward from the margin you want
Profit targets are best set as a margin, yet quotes are built up from cost. To join the two, convert the target margin into the markup it needs, or divide cost by 1 minus the margin directly. Both routes give the same price, and the table shows the markup for common targets.
| Margin you want | Markup needed | Price on a $1,000 cost |
|---|---|---|
| 10% | 11.11% | $1,111.11 |
| 15% | 17.65% | $1,176.47 |
| 20% | 25.00% | $1,250.00 |
| 25% | 33.33% | $1,333.33 |
| 30% | 42.86% | $1,428.57 |
| 35% | 53.85% | $1,538.46 |
| 40% | 66.67% | $1,666.67 |
For a target that is not in the table, use margin ÷ (1 minus margin), or type the cost and margin into the free calculator and read off the markup.
What the mix-up costs on a real quote
Adding your target margin as a markup always underprices the job. Say a kitchen refit costs you $8,000 and you want a 25% margin. Adding 25% gives $10,000, which is only a 20% margin. The right price is $8,000 ÷ 0.75 = $10,666.67, so the shortcut gives away $666.67.
| Method | Price | Profit | Margin |
|---|---|---|---|
| Cost × 1.25 (markup used by mistake) | $10,000.00 | $2,000.00 | 20.0% |
| Cost ÷ 0.75 (margin done properly) | $10,666.67 | $2,666.67 | 25.0% |
| Difference | $666.67 | $666.67 | 5 points |
Over a year it adds up fast. On $400,000 of sales, five points of margin is $20,000 of profit you planned for and never saw. The same error hides inside hourly rates, which is why the guide to labor cost per hour divides by 0.85 rather than multiplying by 1.15.
How discounts eat into margin
A discount comes straight off profit, not off cost, so it cuts your margin far more than the headline percentage suggests. Take the $2,000 job priced at $2,500. A 10% discount removes $250 from the price, and that $250 is half of the $500 profit.
| Discount | Price | Profit | Margin |
|---|---|---|---|
| None | $2,500 | $500 | 20.0% |
| 5% | $2,375 | $375 | 15.8% |
| 10% | $2,250 | $250 | 11.1% |
| 15% | $2,125 | $125 | 5.9% |
| 20% | $2,000 | $0 | 0.0% |
Before agreeing to a discount, check what is left with the calculator, or offer a smaller scope instead of a smaller price. The guide on answering a quote rejection has other ways to keep the job without giving the profit away.
Mixed markups on one quote
One quote often carries different markups on labor, materials and subcontractors. To see the real margin on the whole job, total the costs and the prices separately and compare them. Averaging the percentages gives the wrong answer whenever the lines are different sizes, which they nearly always are.
| Line | Cost | Markup | Price |
|---|---|---|---|
| Labor | $1,000 | 50% | $1,500 |
| Materials | $4,000 | 10% | $4,400 |
| Electrician, subcontracted | $1,000 | 10% | $1,100 |
| Total | $6,000 | $7,000 |
Profit is $7,000 minus $6,000, or $1,000. That is a 16.67% markup on the job and a 14.29% margin. The simple average of the three markups is 23.33%, which overstates the real figure by more than six points because the big materials line carries the smallest markup. The materials markup guide covers how to set that rate.
Gross margin, net margin and overhead
The margin on a quote is a gross margin: it measures the job’s direct costs only. Rent, vehicles, software and office time still have to be paid out of it, and what remains is net profit. A job can show a healthy gross margin and still lose money when overhead was never counted.
- Job price
- $10,000
- Direct costs (labor, materials, subs)
- $7,000
- Gross profit and gross margin
- $3,000, or 30%
- Share of overhead
- $1,800
- Net profit and net margin
- $1,200, or 12%
Either price overhead into the cost before you add margin, as the guide on pricing a job does, or set a gross margin high enough to carry it. Working out overhead per hour gives you the figure either way.
Enter a cost and a markup, a margin or a selling price to see the price, profit, markup and margin together.
Markup and margin questions
Is a 20% markup the same as a 20% margin?
No. A 20% markup on a $1,000 cost gives a $1,200 price and $200 profit, which is a 16.67% margin. To earn a 20% margin you need a 25% markup, or a price of $1,000 ÷ 0.80 = $1,250. The two percentages only match at zero.
Which is higher, markup or margin?
Markup is always the higher percentage for the same job, because it divides profit by cost, which is the smaller number. Margin divides the same profit by the larger selling price. As profit rises the gap widens: a 100% markup is a 50% margin.
How do I convert markup to margin?
Divide the markup by 1 plus the markup, using decimals. A 30% markup is 0.30 ÷ 1.30 = 0.2308, so a 23.08% margin. To go the other way, divide the margin by 1 minus the margin: a 30% margin needs 0.30 ÷ 0.70 = 42.86% markup.
Should I quote using markup or margin?
Use whichever is easier on the line in front of you, but set your targets as margins. Markup is handy for adding a fixed percentage to materials or subcontractor costs. Margin is what tells you whether the business is earning enough, so check the whole quote’s margin before you send it.
What is a good profit margin for a contractor?
There is no single right number, and we do not quote industry averages. Your margin has to cover overhead you have not priced elsewhere, callbacks, slow months and the risk in each job. Work out your overhead first, then set a margin that leaves real profit after it.
What is the markup vs margin formula?
Markup = (price minus cost) ÷ cost. Margin = (price minus cost) ÷ price. On a $1,000 price with an $800 cost, the markup is $200 ÷ $800 = 25% and the margin is $200 ÷ $1,000 = 20%.