Margin vs markup for manufacturers, with a conversion table

Markup is profit expressed as a share of cost; margin is the same profit expressed as a share of the selling price. A part that costs €80 and sells for €100 has a 25% markup and a 20% margin. To reach a target margin, divide the cost by one minus the margin. Multiplying by one plus the margin gives a smaller margin than you intended, and that slip costs a few points on every job it touches.

The formulas

Markup is the natural way to build a price up from cost, which is why cost-plus pricing uses it. Margin is the natural way to read a profit and loss account, because it shows what share of every euro of sales you keep.

Conversion table

The two diverge faster as profit rises. At 10% they are almost the same; at 50% margin the markup is double. A 100% markup is only a 50% margin, and no markup, however large, reaches a 100% margin.

Worked example: the same job, priced both ways

If your target is a 25% margin and someone on the team applies a 25% markup, every job leaves €66.67 in every €800 of cost on the table. Nothing looks wrong on the quote. The gap shows up in the accounts months later.

Discounts come out of margin

A discount is taken off the price, but the cost does not move, so the whole discount comes out of profit.

A 10% discount halved the profit. To earn the same total profit after the discount you would need to sell twice as much. The general rule: at margin m, a discount d needs m ÷ (m − d) times the volume to stand still.

This is worth having in front of you when a buyer asks for a quantity discount. Set-up savings at higher quantities can justify a lower unit price; quantity pricing and batch discounts shows how to calculate the price that the batch really earns, rather than taking a percentage off.

Which one should your shop use?

Either, as long as there is only one. Margin has the advantage that it matches the accounts: when the year-end figures show a gross margin, the target in your quotes can be compared with it directly. Markup has the advantage that it is easy to apply to a cost on a calculator, which is why it survives on shop floors and in older spreadsheets.

Whichever you pick, write it at the top of the quoting sheet, in the price rules and in the training notes, in words: “margin, as a share of the selling price” or “markup, as a share of cost”. Most of the losses described below come from two people in the same shop using the same word for different things.

Common mistakes

Multiplying by one plus the margin. The most common error, shown above. A 30% margin on €700 is €700 ÷ 0.70 = €1,000, not €700 × 1.30 = €910 (which is a 23% margin).

Comparing a margin with a markup. A salesperson’s “30%” and the accounts’ “30%” may be different numbers. Convert before you compare.

Applying margin before overhead. If margin is applied to direct cost only, the overhead has to come out of it. Either add overhead to the cost first or set a margin high enough to carry it, and know which one you are doing. Allocating overhead for job shops covers how to get an overhead figure you can trust.

The same margin on pass-through costs. A subcontracted heat treatment or a courier charge carries little risk or effort for you. Putting your full margin on it makes the price uncompetitive against a buyer who can see the subcontractor’s price. Many shops apply a smaller handling markup to pass-through items.

Stacked markups. A markup on material, then another on the subtotal that already contains the marked-up material, compounds: 15% then 25% is a 43.75% markup on that material (1.15 × 1.25 = 1.4375), not 40%.

Discounting the margin, not the price. “Take 5 points off the margin” and “5% off the price” are not the same thing. On an €800 cost at a 25% margin, 5 points off the margin gives €800 ÷ 0.80 = €1,000; 5% off €1,066.67 gives €1,013.34.

Gross margin and contribution margin

The margin in a quote is usually calculated on full cost: direct cost plus allocated overhead plus risk. That is a gross margin in the sense your quotes use, and it tells you whether a job pays its way once every cost is shared out.

Contribution margin is calculated on variable cost only: the material, the running cost of the machine, the labour that would not be paid without the job, the outside processing. Overhead is left out, because it is paid whether you take the job or not. It answers a different question: does taking this job leave the shop better off than not taking it?

Quote on full cost so that, across the year, every job carries its share. Use contribution when deciding whether to accept a price below your usual one in a quiet week: a job that covers its variable cost and contributes something to overhead beats an idle machine, as long as it does not set the price for the work you would have won anyway.

Margin is a decision, not a constant

A single margin across every job is simple and almost always wrong. Work that only you can do, a rush, a difficult material or a customer who values certainty can carry more; commodity work where the buyer has five other quotes can carry less. That is the idea behind value-based pricing: the cost tells you the floor, the market tells you the ceiling, and the margin is where you choose to stand between them.

Where margin sits in the quote

Margin is the last step in the cost build-up described in how to quote a manufactured part: direct costs, overhead and risk first, margin last, applied once. A price breakdown that shows cost and margin as separate lines makes it obvious which convention a quote used.

In Quotometry, margin is a setting in the shop’s configuration and can be set either as a markup on cost or as a gross margin on price, so the shop chooses the convention explicitly rather than by habit. The pricing engine page shows where it sits in the calculation.

Questions people ask

• Margin
• Markup
• Cost-plus pricing
• Value-based pricing
• Price breakdown
• Overhead