Markup vs. Margin: How Trades Owners Should Price Parts and Labor
Are you marking up parts 30% and thinking you make 30%?
You don't. You make about 23%.
Markup and margin sound like the same thing. They're not. Mixing them up is one of the quietest ways a trades business underprices its work.
Here's the difference, and how to use each one.
Two Ways to Measure the Same Profit
Say you buy a water heater for $1,000 and charge the customer $1,500. You made $500.
That $500 is the same money either way. What changes is what you compare it to.
Markup compares profit to your cost. You added $500 to a $1,000 cost. That's a 50% markup.
Margin compares profit to your price. You kept $500 out of a $1,500 sale. That's a 33% margin.
Same job. Same $500. Two different percentages.
Why? Because your cost is always smaller than your price. So the same dollar amount is always a bigger percentage of your cost than of your price. Markup is always the bigger number.
The Formulas
Markup = (price − cost) ÷ cost × 100
$500 ÷ $1,000 × 100 = 50%
Margin = (price − cost) ÷ price × 100
$500 ÷ $1,500 × 100 = 33.3%
One more term you'll see. Gross margin is your margin across the whole business. It's the share of your sales left after job costs, like parts, techs' pay for job hours, and subs. It shows up on your Profit and Loss report.
Why the Difference Costs You Money
Most owners think about profit as a share of the sale. "I want to keep 30 cents of every dollar." That's a margin goal.
But they price with a markup. "Cost plus 30%."
Here's what that does to the water heater.
Cost plus 30%: $1,000 × 1.30 = $1,300 price. You keep $300 out of $1,300. That's a 23% margin, not 30%.
What a 30% margin takes: $1,000 ÷ 0.70 = $1,429 price. You keep $429 out of $1,429. That's 30%.
That's $129 left on the table on one install. Do that on every job for a year, and it adds up fast.
Markup to Margin Conversion Chart
Find the margin you want in the left column. The right column is the markup that gets you there.
Margin you want | Markup you need |
|---|---|
10% | 11.1% |
15% | 17.6% |
20% | 25% |
25% | 33.3% |
30% | 42.9% |
35% | 53.8% |
40% | 66.7% |
45% | 81.8% |
50% | 100% |
Going the other way, here's the margin you actually get from common markups.
Markup you charge | Margin you get |
|---|---|
10% | 9.1% |
20% | 16.7% |
25% | 20% |
30% | 23.1% |
40% | 28.6% |
50% | 33.3% |
75% | 42.9% |
100% | 50% |
Notice the pattern. A 100% markup, doubling your cost, gets you a 50% margin. Not 100%.
How to Convert Between Them
You don't need the chart if you have a calculator.
To go from margin to markup: markup = margin ÷ (1 − margin)
For a 30% margin: 0.30 ÷ 0.70 = 0.429, or 42.9%
To go from markup to margin: margin = markup ÷ (1 + markup)
For a 30% markup: 0.30 ÷ 1.30 = 0.231, or 23.1%
To price straight from a margin goal: price = cost ÷ (1 − margin)
For a $1,000 part at a 30% margin: $1,000 ÷ 0.70 = $1,429
That last one is the formula worth keeping on your phone.
It Works on Labor, Too
The same math applies to your hourly rate.
In How to Calculate Overhead for a Trades Business, a two-tech HVAC shop carried about $46 of overhead per billable hour. In Labor Burden: How to Calculate Your Fully Burdened Labor Rate, each tech cost about $57 per billable hour once payroll taxes, workers' comp, and health insurance were added.
So every billable hour costs that shop about $103.
Say the owner wants a 20% margin on labor.
$103 ÷ (1 − 0.20) = about $129 an hour
That's a 25% markup on cost. If the owner had added 20% to cost instead, the rate would be about $124, and the margin would only be about 17%.
What Markup Should You Use?
You'll find plenty of "standard markup" numbers online. Most of them come from general contractors and big construction jobs. They don't fit a service call.
Work backward instead.
Know your costs. Parts, plus your fully burdened labor and overhead per billable hour.
Pick the margin you want to keep. That's a business decision, not a rule of thumb.
Convert it to a markup with the chart or the formula.
Check it against your books. Your Profit and Loss report shows your real gross margin. If it's lower than the margin you priced for, something is leaking. It might be callbacks, unbilled parts, or a discount nobody tracked.
Common Mistakes
Using the markup as the margin. A 30% markup is a 23% margin. Always convert.
Marking up parts but not labor. Your techs' time has a cost too, and it needs its own margin.
Using wage as the labor cost. Your real cost is the fully burdened rate, plus overhead.
Never checking the result. The price you quoted and the margin you kept can be very different numbers.
Where Your Books Come In
You can only check your margin if your books show it. That means job costs, like parts, job labor, and subs, sit in their own section of your Profit and Loss report, above overhead.
When the books are set up that way, your gross margin is one number at the top of the report every month. If you want to see why that matters, read Why Your P&L Doesn't Match Your Bank Account.
Key Takeaway: Markup compares profit to your cost. Margin compares it to your price. A 30% markup is only a 23% margin. Decide the margin you want to keep, then convert it to a markup with price = cost ÷ (1 − margin). Use the same math on parts and on labor.
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Want your real gross margin on one report every month? See our bookkeeping plans for contractors. Wondering what that costs? Read How Much Does an Accountant Cost for a Small Business?
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