Here's a question that decides whether a busy year is a profitable one: when you "add 40%" to a part, are you making a 40% profit? Almost every tradesman says yes. Almost every tradesman is wrong, and the mistake is costing them real money on every ticket.
The two words, defined once
Markup is the amount you add on top of what something cost you, measured against the cost. Margin is the amount of profit in the sale, measured against the price the customer pays. Same dollars of profit — measured against two different starting points, which is why the percentages never match.
A $100 part sold for $140 has $40 of profit in it either way. As markup, that $40 is measured against the $100 cost: 40%. As margin, that same $40 is measured against the $140 the customer paid: 28.6%. Nothing changed but the yardstick.
Every markup number is a bigger-sounding version of a smaller real margin.
The table worth taping to the truck
Because the two drift further apart as the numbers climb, a markup that feels generous can leave you with a margin that doesn't cover your overhead. Here's the conversion:
| If your markup is | Your real margin is |
|---|---|
| 20% | 16.7% |
| 30% | 23.1% |
| 40% | 28.6% |
| 50% | 33.3% |
| 66.7% | 40.0% |
| 100% | 50.0% |
How to price for the margin you actually want
Stop adding a percentage. Start dividing. If you want a job to carry a real 40% margin, take your cost and divide it by 0.60 — that's 1 minus your target margin. The part that cost you $100 has to bill at $166.67. Want 50% margin? Divide by 0.50. Want 35%? Divide by 0.65.
Price = Cost ÷ (1 − margin). For a 40% margin: $100 ÷ 0.60 = $166.67. Add-40%-markup would have charged $140 and quietly handed back eleven points of profit.
On one part, eleven points is a few bucks. Across a year of jobs, on every part you touch, it's the difference between a shop that pays you and a shop you pay to keep open. It's the same overhead logic behind setting your shop rate — the money's real, it's just quiet.
Questions
Is a 40% markup the same as a 40% margin?
No. A 40% markup is only a 28.6% margin. Markup is measured against your cost; margin is measured against the price the customer pays. The same dollars of profit produce two different percentages.
How do I price for a specific margin?
Divide your cost by (1 minus the margin you want). For a 40% margin, divide cost by 0.60. A $100 part must bill at $166.67. Adding 40% markup would only charge $140 and leave you at a 28.6% margin.
Why does confusing margin and markup cost money?
If you add a markup percentage while believing it's your margin, every job earns less profit than you think. On a 40% markup you keep 28.6%, giving back more than eleven points of profit on every part, all year long.
Set the margin once. Never do this math on a job again.
Dead Hand holds your margin and applies it to every part automatically — the price comes out right whether you did the division in your head or not.
Get Dead Hand