Mark-up or Margin, what is the difference?

Almost every contractor I worked with over the last few years, and there have been many, used a mark-up formula in their pricing. In most cases it was something like $55 per hour for labor, plus materials marked up 25%. (We will talk about the labor charge later because it is more complicated)

“I need 25% margin to be profitable” they say. “So why don’t you price to achieve that margin?” I ask. “Your 25% mark-up is actually a 20% margin!” It usually takes half an hour plus a calculator and several scraps of paper before they agree that they are pricing their product/service 5% lower than they intended.

You can try it yourself, but to save a little time, here is a table:

Mark-up % Mark-up Factor Margin %
10.00% 1.10 9.09%
15.00% 1.15 13.04%
20.00% 1.20 16.66%
25.00% 1.25 20.00%
33.33% 1.33 25.00%
40.00% 1.40 28.57%
50.00% 1.50 33.33%

As you can see, the margin mark-up disparity increases as the mark-up increases. So remember, to get your 25% margin, you need to mark-up by 33.33%. By doing that you increase you profit by 5%.

You can down load a fuller version of this table here.