Understanding the difference between markups and margins is crucial for setting accurate prices and analyzing profitability. Although they are related, they are used for different purposes and calculated differently. These two terms are often used interchangeably, but they are in fact very different. 

What is markup?

In short, it is the percentage added to the cost of our work, labor, service, or products sold. It determines the full selling price of the job. Markup tells you how much you increase the cost to set the selling price.

Markup helps determine how much to charge up and above the cost of the products or services. It focuses on the price relative to the cost.

Formula:

In the below example the direct and indirect costs of a kitchen are $50,000.00. A 50% markup on the cost of that project gives you your total selling price which is $75,000.00. Simply put, the selling price is 50% more than the cost of the job.

Markup % = ((Selling Price - Cost ) / Cost) x 100

‍Example:

• Cost of a kitchen remodel: $50,000

• Desired markup: 50%

• Selling Price: $50,000 × (1 + 0.50) = $75,000

‍

What is margin? 

Margin or gross profit margin is the percentage of the selling price that is profit after deducting costs.

Margin helps analyze profit as a portion of revenue. It focuses on profit relative to the price point. Remember revenue is essentially the total income earned by a business before any costs or expenses are deducted. Deductions would include costs, taxes, and any other expenses. Margin tells you how much of the selling price is profit.

Formula:

In the below example imagine that you sold a kitchen for $75,000.00 but it cost you $50,000.00 in direct and indirect costs to put that project in place. The $25,000.00 in gross profit reflects the 33.33% profit margin or 33.33% of the $75,000.00 selling price. Simply put, the margin is 33% of the selling price of the job.

Margin % = ((Selling Price - Cost) / Selling Price) x 100

Example:

• Selling Price: $75,000

• Cost: $50,000

• Margin: ((75,000 - 50,000) / 75,000) x 100 = 33.33%

What are the key differences between the two? Markup calculates profit as a percentage of the cost and margin calculates profit as a percentage of the revenue or selling price. 

What are the relationships between the two? Markup is always going to be higher than the margin percentage for the same cost and selling price. 

Markup % = ((Margin %) / (1 - Margin %)) x 100

((.3333 / (1-.3333)) x 100 = 49.99% or 50% Markup

Margin % = ((Markup %) / (1 + Markup %)) x 100

((.50 / 1 + .5)) x 100 = 33.33% Margin

‍

Why does this matter? 

Markups help you to establish your pricing while margins help analyze your profitability. Remember, markups are what you charge on top of your services or goods. Markups determine your selling price. Margins are the percentage of your selling price that is profit after deductions and expenses. Margin is a function of markup and vice versa. Markups are larger than margins.

Just because you have a 100% markup does not mean that you are profitable or that your margins are sustainable. You have to understand your revenue as well as your expenses, deductions, and cost of goods sold, in order to understand profitability and margins. 

Confusing markup and margin or not fully understanding them can lead to underpricing or overestimating profits on a project. 

Remember, that a 50% markup on costs results in a 33.33% margin on the selling price. That is a big difference that needs to be understood and accounted for adequately.

‍