How it works
- Margin and markup
- Margin is profit as a share of the selling price. Markup is profit as a share of the cost. The same sale always shows a higher markup than margin.
- Gross profit = price − cost
- Margin % = gross profit ÷ price
- Markup % = gross profit ÷ cost
- Price for a target margin = cost ÷ (1 − target margin)
A 50% markup is only a 33% margin. Quote on markup and report on margin, and the gap shows up as missing profit.
Questions
Which should I use for pricing?
Either works if you are consistent. Most owners find margin easier to compare with their financial statements, because gross margin on the income statement is calculated on revenue.
How do I convert markup to margin?
Margin = markup ÷ (1 + markup). A 25% markup is a 20% margin; a 100% markup is a 50% margin.
Should cost include labour?
For gross margin, include the direct costs of delivering the sale: materials and the labour that goes into the job. Overheads such as rent and admin salaries sit below gross margin.
General information, not advice for your situation. Results are only as good as the numbers you enter.