What is the difference between markup and margin?
Short answer
Markup is profit as a share of cost, and margin is profit as a share of price. Margin equals markup divided by (1 + markup), so a 20% markup is a 16.67% margin, and a 20% margin needs a 25% markup. On a cost of 1,134,000, a 20% markup earns 226,800 of profit on a 1,360,800 price.
Markup and margin both describe profit, but they divide it by different amounts. Markup divides profit by cost. Margin divides profit by price. Because the price is always cost plus profit, the margin is always the smaller of the two for the same profit. Confusing them is one of the most common pricing errors in construction bids and in other businesses that quote a price from a cost.
How are markup and margin defined?
- Markup = profit / cost
- Margin = profit / price
- Price = cost + profit
Take a job that costs 100 and earns 20 of profit. The markup is 20 / 100 = 20%. The price is 100 + 20 = 120, and the margin is 20 / 120 = 16.67%. Both numbers describe the same 20 of profit, but the margin is measured against a larger base.
How do I convert a markup into a margin, and back?
Because the two are linked through the price, each converts to the other with one formula:
margin = markup / (1 + markup)markup = margin / (1 - margin)
For example, a 20% markup gives a margin of 0.20 / 1.20 = 16.67%. A 20% margin needs a markup of 0.20 / 0.80 = 25.00%. A 10% markup is a 9.09% margin, and a 10% margin is an 11.11% markup. The gap widens as the percentages grow, so a 30% markup is only a 23.08% margin, while a 30% margin needs a markup of 42.86%.
What price results from a 20% markup versus a 20% margin?
A bid is estimated at a cost of 1,134,000. Two pricing methods give two different outcomes.
Method 1: apply a 20% markup to cost.
- Profit: 1,134,000 × 0.20 = 226,800
- Price: 1,134,000 + 226,800 = 1,360,800
- Margin: 226,800 / 1,360,800 = 16.67%
Method 2: target a 20% margin on price.
- Price: 1,134,000 / (1 − 0.20) = 1,417,500
- Profit: 1,417,500 − 1,134,000 = 283,500
- Markup: 283,500 / 1,134,000 = 25.00%
The estimator who applies a 20% markup and reports it as a 20% margin has under-priced the job by 56,700 against a 20% margin target. The fix is to decide which figure the company is targeting and convert before the price goes out.
Should I use markup or margin when pricing a bid?
Estimates are built from cost, so markup is the natural figure when pricing up from cost. Profit reports and comparisons with other businesses usually use margin, because margin is the share of each sales dollar that is profit. A quoted price should state which one is meant, and the internal estimate should keep the two apart, with the conversion done in one place.
How do I convert markup and margin in a spreadsheet?
Put the cost in B1, the markup as a decimal in B2 (0.20 for 20%), and the margin target as a decimal in B3. Use these formulas:
- Profit from markup:
=B1*B2 - Price from markup:
=B1*(1+B2)or=B1+B1*B2 - Margin from markup:
=B2/(1+B2) - Markup from margin:
=B3/(1-B3) - Price from a margin target:
=B1/(1-B3) - Check the margin of a price:
=(price-B1)/price
Format the markup and margin cells as percentages, and keep the values as decimals in the formulas. Typing 20 instead of 0.20 makes the profit 20 times the cost.
The bid markup calculator is the place to set up a bid price with these formulas. For the full bid build-up, including general conditions, overhead and a bond premium, and a worked bid tabulation, see markup vs margin in a construction bid.