Markup versus Margin, what is the difference?

By John Corban

What is the difference between markup and margin, and why is it important to know?

I have spoken with many business owners over the years, and two misunderstood quoting terms are markup and margin.

Some people assume they both mean the same thing. However, there is a significant difference between the two! Knowing the difference between them can be a key factor in your business, either making a profit or a loss.

A simple explanation

Margin and markup are business terms related to calculating profit, but they represent different ways of looking at the same transaction.

Markup represents the percentage added to the cost price (of material/equip/labour) to reach the selling price.
Margin represents the percentage of the selling price that is profit.

Let’s look at an example:

Markup
We add a 30% markup to a material that costs $100.
To calculate the markup, we enter the product cost price ($100) into a calculator, and then x 30% = $30.
Then we add $100 and $30 together. As the example below shows.

Quoted price to client:                     $130.00
Markup (30%) which is:                    $30.00
Product Cost:                                   $100.00

Markup = 30%

Margin
Now, let’s work out the margin, or the full term, which is Gross Profit Margin. Here, we look at the same material as above. The profit is the same amount: $30.

Quoted Price to Client:                    $130.00
Product Cost:                                   $100.00
Gross profit                                        $30.00
Margin = 23.8%

To work out margin we place ($30.00) in a calculator and divide by the selling price ($130.00) = 23.8%

So, the percentage represents the relationship between Gross Profit and Selling Price (not profit and cost price, as in markup).

Tip – Margin is always a smaller percentage than markup in the same sale or quote.

A misconception by some
Some people think if they are marking up 20%, then that is the profit they are making, but as a profit percentage, it’s less, at only 16.67%. The amount of money they make is still $20, but as a percentage, the two differ.

Why is it important to know this?
Failure to understand the difference between markup and margins can result in incorrect price setting. If your pricing is too low, it can result in lost profits. I often see a markup on materials/labour/subcontractors covering the costs of a job, leaving a profit too small to cover the running costs of a business.

I always explain the differences between markup and margin when discussing quoting and analysing a P&L Statement for my clients. I want them to understand their business gross profit margin to cover overheads leaving their desired net profit.

I will always show a client what profit margins they need, both Gross Profit and Net Profit Margins. Then, we plan the quoting (applying the right markups to products, labour, and subcontractors).

I also explain the expected Gross Profit margin needed in a garden maintenance business. This approach helps us set labour charge-out rates and markups on materials.

If a project has a lower profit margin, it’s not always due to the wrong markup.

If your project profit ends up lower (it may not be your markup that is wrong or not high enough, but your team may have taken longer to build the job, than estimated). So, tracking and reviewing a project is essential with all your jobs.

I have written about this topic because it is important to understand it when quoting and making a decent profit from the projects you install. If you are unsure about your markups and margins, read through this again, apply it to your quotes, and do some calculations.

Cheers to more profit in your business!

John Corban
Business Coach for Landscapers,

Horticulturists and Nursery owners
Mob: 0433 27 1980
www.landscaperscoach.com.au