Markup vs margin
Also known as: pricing markup, gross margin
Two different ways of expressing the relationship between cost and selling price. Markup = (price - cost) / cost. Margin = (price - cost) / price. Same dollar amount, different percentages.
Markup and margin both describe the relationship between cost and selling price, but they're calculated differently and produce different percentages.
Markup = (Selling Price - Cost) / Cost. A $40 part sold for $100 has a markup of $60 / $40 = 150%. Margin = (Selling Price - Cost) / Selling Price. The same $40 part sold for $100 has a margin of $60 / $100 = 60%.
The relationships: - 25% markup = 20% margin - 50% markup = 33% margin - 100% markup = 50% margin - 200% markup = 67% margin - 300% markup = 75% margin
For service businesses, the distinction matters because they're commonly confused. A statement like '50% on this part' is ambiguous — markup or margin? The answer changes the price by 33%. Industry conventions vary: residential service operators typically describe pricing as margin; some plumbing and HVAC suppliers describe pricing as markup; commercial construction often uses markup.
When setting service-menu pricing, the cleaner approach is to work in margin terms. Target margins by service type (e.g., 50% margin on parts, 60% margin on labor) directly support 'I need to charge X to hit my target' calculations. Markup-based thinking can mislead — a '100% markup' sounds aggressive but yields only 50% margin.
Related terms
Gross margin
Revenue minus direct costs (parts, labor, materials), expressed as a percentage. The fundamental profitability measure of service work. Healthy residential service gross margin: 35-55%.
Blended labor rate
Single hourly rate used for billing customers, calculated as a weighted average of the actual loaded labor costs of different tech tiers. Simplifies pricing while accounting for labor-cost variation.