Markup vs margin: the difference, and why it costs freelancers money
Both describe the same profit, measured against different numbers. Confusing them quietly lowers your prices.
Same profit, two different yardsticks
Say a job costs you 100 to deliver and you charge 150. Your profit is 50. Whether that is “50%” or “33%” depends on what you compare the 50 to.
Markup compares profit to cost: 50 ÷ 100 = 50%. Margin compares profit to the selling price: 50 ÷ 150 = 33.3%. Neither is wrong. They answer different questions — markup tells you how much you added on top of cost, margin tells you how much of each sale you keep.
Where the confusion costs money
The trouble starts when a target is set in one and applied in the other. A business that wants a 40% margin and prices by adding 40% to cost ends up with 100 × 1.4 = 140. The profit is 40, and 40 ÷ 140 is only 28.6%.
On a 20,000 year of project costs, that gap is the difference between 13,333 and 8,000 of profit. Nothing looks wrong on any single invoice; it only shows when the year's numbers come in lower than planned.
Converting between them
You can turn one into the other without knowing the price or cost:
- Margin = markup ÷ (100 + markup) × 100. A 50% markup is a 33.3% margin.
- Markup = margin ÷ (100 − margin) × 100. A 40% margin needs a 66.7% markup.
- To price for a target margin directly: price = cost ÷ (1 − margin). For a 40% margin on 100 of cost, 100 ÷ 0.6 = 166.67.
A quick reference
A few pairs worth remembering: 25% markup ≈ 20% margin; 50% markup ≈ 33% margin; 100% markup = 50% margin; 200% markup ≈ 67% margin. Notice that markup can go as high as you like, while margin can never reach 100% as long as the work costs anything.
Which one to use
Pick one and use it everywhere — in your targets, your quotes and your reviews. Margin is the usual language of financial reports and is easier to compare between businesses of different sizes. Markup is often easier when you are building a price up from costs. What matters is that everyone involved, including you six months from now, knows which one a number means.