You're pricing a job. Your costs are £1,000. You decide to mark it up 50%. So you charge £1,500. You think you've made £500 profit, which is 50% of your cost.
Except you haven't. You've only made £500, which is 33% of your revenue. Your margin is 33%, not 50%.
This confusion — between markup and margin — is bankrupting small businesses across the UK. Not because business owners are stupid. But because markup feels easier to calculate, and it sounds better. A 50% markup sounds impressive. A 33% margin sounds... less impressive, even though it's the same thing.
The problem is: when you're pricing by markup, you're setting yourself up for failure. When you're pricing by margin, you're protecting yourself. Let's dive in.
Markup vs Margin: The Math
Let's define them clearly:
Markup is the percentage you add on top of your cost price.
Margin is the percentage of your sales price that stays as profit.
Look at the difference. Markup divides by the cost. Margin divides by the sales price.
This is why they're different. And why margin is what actually matters.
The Simple Example That Shows Why It Matters
You're a plumber. A job costs you £500 (materials and labour). You mark it up 40%. You charge:
You think you've made a 40% profit. In reality, your margin is:
You thought you had 40%. You actually have 28.6%. That's a 11.4% difference on a single job. Over a year of jobs, that's the difference between profit and loss.
Why Markup Feels Natural (And Why That's Dangerous)
Markup feels intuitive because you think in terms of cost. You know what a job costs you — £500 for materials and labour. You think "I want to add 40% on top." So you charge £700.
It feels right. You've "made" the 40%. But you haven't. The £200 profit is only 28.6% of what you charged.
Here's why this matters: your overheads don't care about markup. They care about margin. Your rent, insurance, and vehicle costs are a percentage of your sales revenue, not a percentage of your costs.
If your overheads are 20% of revenue, and your margin is only 28.6%, you've got 8.6% left for actual profit. Barely anything. One surprise cost, one delayed payment, one overhead you forgot to account for, and you're in the red.
But if you'd priced by margin instead — if you'd said "I need a 40% margin" — you'd charge more, and you'd be protected.
Real Examples From the Trades
Example 1: The Plumber Who Thought He Was Doing Well
Mark's a plumber. He works with a 40% markup. He thinks it's solid. Over a year, he does 80 jobs at an average cost of £400 each. That's £32,000 in costs, £44,800 in revenue (£400 × 1.40 = £560 per job).
Gross profit: £12,800. That sounds good.
But his actual margin is only 28.6% (remember, 40% markup = 28.6% margin). So his gross profit is actually:
His overheads are £9,000 a year. So his net profit is £3,813, or about £318 a month. For a plumber running a business, that's lean. Too lean.
If Mark had instead priced for a 40% margin, he'd charge £666 per job (£400 / (1 − 0.40) = £666). His annual revenue would be £53,280. His gross profit would be £21,280. After overheads, his net profit would be £12,280 — more than three times what he actually made.
He was leaving £8,500 a year on the table by confusing markup and margin.
Example 2: The Builder and the Material Explosion
You're building a small extension. Materials cost £15,000. Labour is £9,000. Total cost: £24,000. You mark it up 60%, thinking that's aggressive pricing. You charge £38,400.
Your actual margin is:
37.5%, not 60%. And here's the problem: halfway through, you realize you underestimated the foundation work. Additional materials cost £3,000. Labour goes up £2,000. Your actual cost is now £29,000.
You still charge £38,400 (you can't change the price now). Your actual margin is now:
You've gone from 37.5% to 24.5%, all because you thought 60% markup was aggressive, when really it was only 37.5% margin — and once costs overran, you were underwater.
If you'd priced for a 40% margin from the start, you'd have charged:
Even with the £5,000 cost overrun, you'd have a margin of 27.5% — still reasonable. You'd have protected yourself with proper pricing.
The Conversion Table: Markup to Margin
Here's a table showing how different markups convert to actual margins. Print this. Stick it on your wall. Stop using markup.
| Markup % | Actual Margin % | Difference |
|---|---|---|
| 10% | 9.1% | -0.9% |
| 20% | 16.7% | -3.3% |
| 30% | 23.1% | -6.9% |
| 40% | 28.6% | -11.4% |
| 50% | 33.3% | -16.7% |
| 60% | 37.5% | -22.5% |
| 75% | 42.9% | -32.1% |
| 100% | 50.0% | -50.0% |
Notice the pattern? The higher the markup, the bigger the gap. A 100% markup looks good — it sounds like you're doubling your money. But it's only a 50% margin.
If you've been pricing by markup, you've probably been underselling yourself by 10-30% on every job. That adds up to tens of thousands of pounds a year.
Why Margin is What Actually Matters
Margin is what matters because that's where your overheads come from. That's where your profit comes from.
When you say "I need a 40% margin," you're saying: "For every pound I charge, 40 pence stays in the business (before taxes). The rest goes to costs."
If your overheads are 20% of revenue (rent, insurance, tools, vehicles), then a 40% margin gives you 20% for profit and growth. That's healthy.
If your margin is only 28.6% (a 40% markup), your overheads eat into 20%, leaving you just 8.6% for profit. You're vulnerable. One bad month, and you're in loss.
Markup is vanity. Margin is sanity. Markup tells you what you added. Margin tells you what stays.
How to Convert Your Business to Margin-Based Pricing
Step 1: Calculate your target margin. For most trades, 35-45% is healthy. Some can run at 30%, some need 50%. Decide what's right for your business.
Step 2: For every job, estimate the cost. Materials, labour, subcontractors — everything.
Step 3: Calculate your sales price using this formula:
So if your cost is £1,000 and your target margin is 40%:
Step 4: Quote that price. Don't negotiate down unless the customer will pay more upfront or take work off the scope.
That's it. Margin-based pricing. Once you switch, you'll never go back.
The Customer Pushback: How to Handle It
When you switch to margin-based pricing, your quotes will go up. Customers will push back. "Your old quote was lower."
Here's how you handle it:
"My previous pricing wasn't giving me enough margin to operate properly. That meant I was cutting corners, rushing jobs, or taking work I shouldn't have taken. I've recalibrated to a model that ensures I can do quality work and still stay in business. This is my new pricing. If it doesn't fit your budget, I understand, but I can't go lower and do the job properly."
Some customers will leave. The ones who stay are the ones who value quality. And they're the ones worth working for.
The Math You Need to Remember
Bookmark this:
Always price by margin, not markup. Margin is what stays in your business. Markup is what you added to cost. They're not the same thing, and this mistake costs tradespeople thousands of pounds a year.
If you want a 40% margin, use: Sales Price = Cost ÷ 0.60
If you want a 35% margin, use: Sales Price = Cost ÷ 0.65
If you want a 50% margin, use: Sales Price = Cost ÷ 0.50
Commit this to memory. Write it on a post-it note. Calculate it before every quote.
Your action step: Look at your last five jobs. Calculate what margin you actually made on each one (not what you thought you marked up). You might be shocked at the difference between what you thought and what you actually got.
What's Next?
Now that you understand the difference between markup and margin, you need to understand the bigger picture: why being busy doesn't mean being profitable. And then dive deeper into how to calculate your true costs using absorption costing.
The bottom line: stop using markup. Start using margin. Your bank account will thank you.