Markup vs margin comes down to what you divide by: markup is your profit as a percentage of your cost, while margin is your profit as a percentage of the price the customer pays. The same job can carry a 30% markup and only a 23% margin, so mixing the two up can quietly underprice work for cleaners, handymen and contractors.
Here are both formulas, a worked example, a quick conversion list and a pricing checklist you can use on your next quote.
Gross profit = price − direct costs. Direct costs are what the job itself takes, such as labor and materials.
Markup = gross profit ÷ direct costs × 100. It answers "how much did I add on top of my cost?"
Margin (gross margin) = gross profit ÷ price × 100. It answers "how much of each dollar the customer pays is left after direct costs?"
Both percentages describe the same dollars of gross profit; they just measure them against a different base. On any profitable job the price is bigger than the cost, so the margin is always the smaller of the two numbers.
Say a deep clean takes $260 of crew labor and $40 of supplies, so direct costs are $300.
Pricing with a 30% markup:
Price: $300 × 1.30 = $390.00
Gross profit: $390.00 − $300 = $90.00
Margin: $90.00 ÷ $390.00 = 23.1%
Pricing for a 30% margin:
Price: $300 ÷ (1 − 0.30) = $300 ÷ 0.70 = $428.57
Gross profit: $428.57 − $300 = $128.57
Markup: $128.57 ÷ $300 = 42.9%
If you meant to keep 30% of every job but priced it with a 30% markup, you would charge $38.57 less on this one job. Across $20,000 of direct costs, the gap grows to $2,571.43 in gross profit ($8,571.43 instead of $6,000).
To turn a markup into a margin, divide the markup by (1 + markup). To turn a margin into a markup, divide the margin by (1 − margin).
20% markup = 16.7% margin
25% markup = 20% margin
33.3% markup = 25% margin
50% markup = 33.3% margin
66.7% markup = 40% margin
100% markup = 50% margin
So if you want a 40% margin, you need to mark your costs up by about 66.7%, not 40%.
Use markup when you build a price up from costs: add up labor and materials, then multiply by (1 + markup).
Use margin when you set targets or check results, because it shows what share of your revenue is left to cover overhead and profit.
Remember overhead. Gross margin only subtracts direct costs. Insurance, your vehicle, phone, rent and other running costs still have to come out of that gross profit before you earn anything.
Watch discounts. A discount comes straight out of your profit. Taking 10% off the $428.57 price above leaves $385.71, and the margin drops from 30% to about 22.2%.
List every direct cost: labor hours at your labor cost, materials, supplies, disposal and equipment rental.
Work out the margin you need to cover your yearly overhead and your profit goal.
Set the price: direct costs ÷ (1 − target margin).
Check the result against what your market and your clients will pay.
After the job, compare what it actually cost with what you quoted, and adjust your next quote.
ScopeBid is an iPhone estimate and invoice app whose Profit Guard shows customer price, direct cost, estimated gross profit, gross margin and markup together, and it can suggest a price from the costs you enter. Its PDF quotes and invoices leave out your internal cost and margin, and while it records deposits and payments, it does not process cards or move money.
Get ScopeBid free on the App Store