A business owner asked me the other day, "Do you know the difference between margin and markup?"
My first reaction was, seriously? That's day one stuff.
Then I thought about it. I've sat across the table from a lot of contractors. Good ones. Guys who do beautiful installs and have happy customers but couldn't tell you the difference on the spot.
Before I set up software for anybody, I have to understand how they actually run their business. Not the textbook way. How they really do it. So the question wasn't dumb at all. It's the first question.
Let's settle it.
Markup: start with cost and pile on top
Markup is the percentage you add on top of what something cost you.
You buy the product from the manufacturer for $10,000. You put 60% on top. That's $6,000. You sell it for $16,000. Simple. That's exactly why so many shops do it.
The assumption is that the 60% covers everything else. Labor, permits, the truck, the office, the insurance, and profit. Some shops run one markup on windows and a different one on doors. Same idea, just more buckets.
Margin: start with the price and work backwards
Margin is the percentage of the selling price that's yours to keep after the cost.
Same job. Sold for $16,000. Product cost $10,000. You made $6,000. Now divide that by the selling price, not the cost.
$6,000 / $16,000 = 37.5%
That 60% markup is a 37.5% margin. Same dollars, different math. A very different picture of your business.
Flip it. If you actually want a 60% margin on that $10,000 of product, the price has to be $25,000. That's $15,000 on top of cost. A 150% markup.
$10,000 / (1 - 0.60) = $25,000
Most guys who say "I run 60" have never once looked at it that way.
The cheat sheet
Here are the two formulas. Tape them to the dashboard.
Margin = Markup / (1 + Markup)
Markup = Margin / (1 - Margin)
| Markup on cost | What it really is as margin |
|---|---|
| 25% | 20% |
| 50% | 33.3% |
| 60% | 37.5% |
| 100% | 50% |
| 150% | 60% |
Notice the pattern. Margin is always smaller than markup on the same job. If you've been quoting markup and thinking margin, you've been giving yourself credit for money you never made.
Why margin is easier to run a business on
Once you know the formula, margin makes life simpler.
You start from the number that matters: what this job has to sell for to cover everything and leave the profit you actually want. You decide the profit first. Everything else falls into place behind it.
With markup you're always hunting. Where did the money go? Was that 60% supposed to cover the extra helper on the second day? The disposal fee? The engineering letter? The answer is usually "it was supposed to," and that's not an answer.
Here's an example with made up numbers.
Product cost is $10,000. Labor is $3,000. Permits, fees and overhead come to $2,000. True cost on the job is $15,000.
Run a 60% markup on the product only, you sell it for $16,000. Take out the $15,000 and you made $1,000. That's about 6% of the job. You felt like a 60% guy and you worked for 6%.
Now do it with margin. You want 30% on the whole job. $15,000 / (1 - 0.30) = $21,428.57. Take out the $15,000 and you keep $6,428.57. That's 30% of the selling price. Every time. On purpose.
Same windows. Same crew. Different math, about $5,400 different.
Nobody cares until the accountant shows up
When jobs are profitable, nobody cares how you priced them. Money's in the bank, phones are ringing, life is good.
Then comes a slow quarter, or a bad year, or a partner who wants to see the books. Time for forensic accounting. That's when backwards markup math bites you. You go job by job trying to figure out what you made, and you can't. Labor was buried in the product markup. Doors were marked up differently than windows. The one job with the HOA headache ate half its profit and nobody noticed because the bank account looked fine.
You never really knew what you made or lost on each job. You just knew the total, and the total hides a lot.
Where software should fit, and where it usually doesn't
Here's my bias, and I'll own it. Your quoting tool should work the way you run your business. Not the other way around.
A good one lets you set up several pricing structures. It lets you set floors and minimums so a small job never goes out the door below what it costs to roll a truck. It handles margins, markups and percentages on every single item. Price windows one way and doors another if that's how you do it. It accounts for labor instead of hiding it. And it lets you name, group and organize all of it into price sets that make sense to you and your salespeople.
And the screen has to flow. If quoting feels like doing taxes, your guys will go back to the calculator on their phone.
That's what we built Quote Converter Pro to do. See it at https://quoteconverterpro.com, and the rest of what we're building is at https://everythingwd.com.
The five ways I see contractors price jobs
After 30 years in this business, almost everybody falls into one of these.
- Cost plus a flat markup: Product cost times one markup across the whole job. Fast and simple. Labor and overhead are guesses hidden inside one number.
- Markup by unit type: One markup for windows, another for doors. Better than one number for everything, but still built on cost. The real margin stays a mystery.
- Manufacturer list price times a multiplier: Start from the list price and apply your own multiplier to sell. Matches how a lot of product is priced to dealers. Your profit moves every time the price list or your discount changes.
- Price per united inch or per opening: A set price per UI (width plus height) or per opening. Easy to quote on the spot. Odd sizes, specialty units and tough installs quietly eat the profit.
- Target margin on total job cost: Add up product, labor and overhead, then price to the margin you want. You know your profit before you sign. You have to know your real costs, and that takes discipline.
Plenty of shops mix these. Some run a target margin with a minimum price on top so the little jobs still pay. That's not cheating. That's running a business.
So, how do you do it?
I've told you how I think about it. Now I want to hear from you.
Which of the five are you running right now? Did you start with markup and switch, or are you still a markup shop and proud of it? Tell me in the comments. No judgment. Okay, a little judgment.
John Stephens