If your total job cost is $1,000 and you mark it up by 30%, you charge $1,300. But $300 profit divided by your $1,300 revenue is only 23% profit margin — not 30%. That 7% shortfall comes straight out of your pocket.
The mathematical difference
Markup is the percentage added to your costs. Margin is the percentage of total selling price that remains as gross profit. Because margin is calculated against the higher selling price, your required markup percentage must always be significantly higher than your target margin.
- Target 20% Margin = Need 25.0% Markup (Cost × 1.25)
- Target 30% Margin = Need 42.9% Markup (Cost ÷ 0.70)
- Target 40% Margin = Need 66.7% Markup (Cost ÷ 0.60)
- Target 50% Margin = Need 100.0% Markup (Cost × 2.00)
The Margin Formula: Divide, never multiply
To hit a target gross margin percentage, use this formula: Quote Price = Total Direct Cost ÷ (1 - Desired Margin). For example, if direct labor and materials equal $4,500 and your target margin is 35%: $4,500 ÷ 0.65 = $6,923.
Accounting for unbillable overhead
Gross margin must cover your vehicle payments, general liability insurance, software, marketing, tools, and office salaries before you take a penny in net profit. If your business overhead runs at 18% of revenue, pricing at a 20% gross margin leaves you with a paper-thin 2% net profit margin.