Markup vs Margin: What's the Difference?
Markup and margin both describe profit — but they use different reference points and produce different numbers from the same job. Confusing them is one of the most common and costly pricing mistakes in contracting and small business.
Definitions
Markup
Profit as a percentage of cost. How much you add on top of what you spend.
Markup = Profit ÷ Cost × 100
Margin (Gross Margin)
Profit as a percentage of revenue. How much of the selling price is profit.
Margin = Profit ÷ Selling Price × 100
Why They Produce Different Numbers
Both markup and margin use the same profit amount in the numerator — the difference is the denominator. Markup divides by cost (a smaller number). Margin divides by selling price (a larger number). So the same profit always produces a larger markup percentage than margin percentage.
The classic mistake:
A contractor applies a “25% profit” expecting to keep 25 cents of every dollar billed. But if that 25% is actually a markup on cost, the true margin is only 20% — they're keeping just 20 cents per dollar.
Worked Example
Job cost: $10,000 with a 25% markup:
Selling price = $10,000 × 1.25 = $12,500
Gross profit = $12,500 − $10,000 = $2,500
Markup = $2,500 ÷ $10,000 = 25% ✓
Margin = $2,500 ÷ $12,500 = 20% ← not 25%
To achieve a 25% margin, you need a 33.3% markup:
Markup needed = 25% ÷ (1 − 25%) = 25% ÷ 75% = 33.3%
Selling price = $10,000 × 1.333 = $13,333
Profit = $3,333 | Margin = $3,333 ÷ $13,333 = 25% ✓
Conversion Formulas
Margin = Markup ÷ (1 + Markup)
Markup = Margin ÷ (1 − Margin)
Use decimal form in formulas: 25% = 0.25
Common Markup → Margin Table
| Markup % | Decimal | Equivalent Margin |
|---|---|---|
| 10% | 0.10 | 9.1% |
| 15% | 0.15 | 13.0% |
| 20% | 0.20 | 16.7% |
| 25% | 0.25 | 20.0% |
| 33.3% | 0.333 | 25.0% |
| 40% | 0.40 | 28.6% |
| 50% | 0.50 | 33.3% |
| 67% | 0.67 | 40.0% |
| 100% | 1.00 | 50.0% |
Which Should You Use?
- Markup is practical when building a price from a cost estimate. Easier to apply: multiply cost by (1 + markup).
- Margin is better for measuring and comparing profitability. Financial reporting typically uses margin because it shows profit relative to revenue.
- Many contractors use markup to price jobs but should track actual results in margin to understand whether their business is truly profitable.
Last reviewed: August 2026
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