Markup and margin describe different calculations. Confusing them can make a price look safer than it is.
Consider an illustrative job with 6,000 in direct delivery costs. The examples use currency units and exclude tax; use one currency consistently in your own calculations. The cost classification is simplified and should match your accounts.
| Calculation | Amount |
|---|---|
| Direct job costs | 6,000 |
| Add a 30 percent markup on costs | 1,800 |
| Selling price | 7,800 |
| Amount left before overhead and other costs | 1,800 |
| Margin on the selling price | 23.1 percent |
To obtain a 30 percent margin on those direct costs, divide 6,000 by 0.70. The price is 8,571.43. This is arithmetic, not a recommended margin for every business. Your required margin depends on overhead, risk, capacity and the work you sell.
Understand the cost of a discount
At a price of 8,000 and direct costs of 6,000, the job leaves 2,000 before overhead and other costs. A 10 percent price discount removes 800. If costs stay the same, the amount left falls to 1,200, a reduction of 40 percent.
Before reducing price, ask whether you can change scope, specification or timing in a way that genuinely reduces cost. If you accept a lower return for a clear business reason, record the reason and the limit. Do not let an exception silently become your normal price.
Check the business as well as the job
Contribution is revenue less the costs that vary with the work. It is not necessarily the same as the margin after your chosen direct job costs. Salaried labor, for example, may be direct for job costing but fixed over a short planning period.
If monthly fixed costs are 9,000 and each comparable job contributes 1,500 after variable costs, six jobs cover those fixed costs in this simplified model. Confirm the assumptions and capacity before treating that as a target. A mixed service business needs a realistic mix of jobs. [R8]
Discuss cost classification with your accountant. The practical question is straightforward: at the price you are considering, what does this job leave to support the rest of the business, and can you deliver enough suitable work without overloading the team?
Markup vs margin calculator
Enter your direct job costs, then a markup or a target margin. You get both figures, and what a discount would remove.
- Selling price
- 7,800
- Left before overhead
- 1,800
- Margin on the selling price
- 23.1%
- Markup on costs
- 30%
A 10% discount removes 780. 1,020 is left, 43.3% less.
Illustrative arithmetic before tax, as in the chapter. Your required margin depends on overhead, risk, capacity and the work you sell.