Pricing Fundamentals
Markup vs Margin: The Difference (With Examples)
Short answer
Markup is what you add on top of cost; margin is what you keep out of the price. A 50% markup is only a 33% margin. Confusing the two is the most common reason small service businesses underprice jobs.
Every service business uses some form of cost-plus pricing — you start with what something costs you and add a percentage. The catch: that percentage can be expressed two different ways, and they produce wildly different prices on the same job. Quoting 30% when you meant 30% the other way can wipe out your entire profit on a job. Here is the difference, with formulas you can use today.
The formulas
Markup is added to cost. Price = Cost × (1 + Markup%). If a part costs you $100 and you mark it up 40%, you sell it for $140.
Margin is taken out of price. Margin% = (Price − Cost) ÷ Price. On that same $140 sale, your margin is ($140 − $100) ÷ $140 = 28.6%.
Same dollar amount, two different percentages — because they use different denominators.
Markup-to-margin cheat sheet
Memorize this table or save it. It is the single most useful pricing reference for a service business.
| Markup % | Equivalent Margin % |
|---|---|
| 20% | 16.7% |
| 25% | 20.0% |
| 33% | 25.0% |
| 50% | 33.3% |
| 67% | 40.0% |
| 100% | 50.0% |
| 150% | 60.0% |
| 233% | 70.0% |
Which one should you use?
Use markup when you are pricing parts and materials. It is simpler at the counter: cost × multiplier = price.
Use margin when you are evaluating profitability or talking to a bookkeeper. Margin is what shows up on your profit and loss statement.
The trap: trade-supplier discount tables and contractor calculators speak in markup. Accounting software speaks in margin. If you do not translate between them, you will think you are making 40% when you are really making 28%.
Setting a target margin for a service business
Service businesses typically need gross margins of 40–60% on the job (parts + labor combined) to cover overhead and leave a real profit. A 30% margin sounds healthy until you subtract truck payments, insurance, fuel, software, and your office time — most of which never gets billed to a customer.
If you are currently quoting at 25% markup on parts and 1.5× wage on labor, you are probably running a 20–25% gross margin. That is below the threshold most trades need to survive a slow quarter.
Frequently asked questions
Is markup always higher than margin?
Yes, mathematically. Markup uses cost as the denominator (smaller number); margin uses price (larger number). Same dollar profit produces a bigger percentage when divided by the smaller number.
What is a healthy markup on materials for trades?
Most contractors mark up materials 25–50%. Specialty parts (HVAC components, custom-fabricated items) often run 75–100% markup to account for procurement time, returns, and warranty exposure.
What margin should I target on labor?
Labor margin should cover the loaded cost of your tech — wages, payroll taxes, workers comp, vehicle, tools — plus overhead and profit. That usually requires charging 2.5–3× the tech's hourly wage.
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Sources & further reading
Primary sources we consulted when writing and reviewing this guide.