Two definitions
From Part 2 of the NASCLA Contractors Guide (GA 3rd Ed.):
- Markup = profit / cost
- Margin = profit / selling price
Profit is selling price minus cost. Only the divisor changes, and because selling price is larger than cost, margin is the smaller percentage. Confusing the two is the central pricing error.
Other ratios are neither: cost / selling price is 1 − margin, and selling price / cost is 1 + markup.
Pricing for a target margin
Selling price = cost / (1 − margin). It is not cost × (1 + margin).
Worked example: cost 80,000 dollars, target margin 20%. Price = 80,000 / 0.80 = 100,000 dollars. Check: profit 20,000 ÷ 100,000 = 20%.
The trap: 80,000 × 1.20 = 96,000 dollars applies the 20% as a markup. Its profit of 16,000 is only 16.7% of 96,000. Subtracting 20% from cost (64,000 dollars) prices the job at a loss.
Converting between them
Price 125,000 dollars on cost 100,000 dollars. Profit = 25,000. Markup = 25,000 / 100,000 = 25%. Margin = 25,000 / 125,000 = 20%. Swapping them, or giving both the same value, is wrong.
Going the other way: a 25% markup on 60,000 dollars gives a price of 60,000 × 1.25 = 75,000 and a profit of 15,000. Margin = 15,000 / 75,000 = 20%. Not 25%, because margin divides by the larger selling price. Not 15%, which confuses the 15,000-dollar profit with a percentage. Not 33.3% (15,000 ÷ 45,000), which divides by cost minus profit.
Spotting the markup-for-margin bid
Cost 150,000 dollars, target margin 25%. An estimator enters 150,000 × 1.25 = 187,500 dollars. That is a 25% markup: profit 37,500 / 187,500 = only a 20% margin.
The correct price is 150,000 / 0.75 = 200,000 dollars (profit 50,000 ÷ 200,000 = 25%). Multiplying by 0.75 (112,500 dollars) prices below cost; 168,750 dollars is a 12.5% markup, the wrong direction.
Rule of thumb: to hit a margin, divide by (1 − margin); to apply a markup, multiply by (1 + markup).