Margin vs. markup: differences and how to use them
Many repair shop owners treat margin and markup as the same thing, and that is where profit starts slipping away. The two metrics are related, but they measure different things. Understanding the difference between margin and markup helps you price with confidence and know how much each job really leaves in the shop's till.
What margin and markup are
Both play a part in pricing and profitability analysis, but they start from different bases: margin looks at the selling price; markup looks at cost.
Profit margin
Profit margin shows how much of the selling price is profit, as a percentage. It is the difference between price and cost, divided by price.
For example, if the shop sells a service for R$ 100.00 and it costs R$ 60.00, the profit margin is:
Margin = [(Selling price − Cost) ÷ Selling price] × 100
= [(100 − 60) ÷ 100] × 100
= (40 ÷ 100) × 100
= 40%
In other words, 40% of the amount charged is profit over that cost.
Markup
Markup is the percentage applied to cost to arrive at the selling price. It has to cover expenses and deliver the desired margin.
A 50% markup means the price is 50% higher than cost:
Selling price = Cost × (1 + Markup)
= 60 × (1 + 0.50)
= R$ 90.00
Note that the margin here is not 50%: the R$ 30.00 profit is about 33% of the R$ 90.00 price. This is the most common mix-up. If the goal is a 50% margin on price, the calculation is different:
Selling price = Cost ÷ (1 − Target margin)
= 60 ÷ (1 − 0.50)
= R$ 120.00
The difference between margin and markup
Margin measures profitability relative to the selling price. Markup is the tool used to set the price from cost. They go hand in hand: the markup you choose determines the margin the shop earns. Applying a markup while thinking it is the margin leads to prices that are too low.
Impact on the shop's revenue
- proper pricing: with the right markup, you set competitive prices without giving up a healthy margin
- profitability analysis: tracking margin shows which services and products contribute most to results and which need review
- supplier negotiations: knowing your costs and target margin, you can negotiate prices and terms with more confidence.
Talk to Onmotor
To track costs, prices and results more easily, rely on repair shop software. See Onmotor's plans for this Brazilian system, start a free trial or talk to our team.