Profit Margin vs Markup: The Difference That Costs You Money
Margin and markup describe the same gap between what a job costs you and what you charge for it — they just divide that gap by different numbers. Gross margin expresses profit as a share of the price the client pays. Markup expresses the same profit as a share of what the work cost you. That distinction is not academic: a 50% markup is only a 33.3% margin, and hitting a 50% margin requires a 100% markup. If you quoted on a 20% markup and then agreed to knock 20% off the price, you did not halve your profit — you removed it entirely and paid for the privilege of doing the work.
Last updated 2026-09-17.
The formulas side by side
| Metric | Formula | Question it answers |
|---|---|---|
| Gross profit | Revenue − Cost | Absolute money left after direct costs |
| Gross margin % | (Revenue − Cost) / Revenue × 100 | Profit as a share of the price (≤ 100%) |
| Markup % | (Revenue − Cost) / Cost × 100 | Profit as a share of cost (no upper bound) |
| Net profit | Revenue − Cost − Overheads | What reaches the business after fixed costs |
| Net margin % | Net profit / Revenue × 100 | What accountants usually mean by margin |
| Price for target margin | Cost / (1 − Target margin ÷ 100) | Forward pricing — the only safe way to quote |
The conversion table: markup vs margin
Memorise these pairs. They are the same profit, expressed differently:
| Markup | Margin | Markup | Margin |
|---|---|---|---|
| 25% | 20.0% | 100% | 50.0% |
| 33.3% | 25.0% | 150% | 60.0% |
| 50% | 33.3% | 200% | 66.7% |
| 66.7% | 40.0% | 300% | 75.0% |
| 75% | 42.9% | 400% | 80.0% |
Margin is always the smaller percentage. Margin = Markup / (1 + Markup). Markup = Margin / (1 − Margin).
The pricing error that destroys profitability
You have a project with £4,000 in direct costs. You want a 40% gross margin.
✗Wrong: Mark up the cost by 40%
You asked for 40% and got 28.6%. The 11.4% gap is pure profit lost.
✓Right: Divide cost by (1 − margin)
You hit exactly the margin you needed.
The Margin Calculator shows both the wrong and right price in its To hit a X% gross margin
panel so the difference is obvious.
Worked example: a £6,500 build
| Revenue (quoted price) | 6,500.00 |
|---|---|
| Direct cost (subcontractor + licences) | 4,000.00 |
| Overheads allocated to the job | 500.00 |
| Gross profit | 2,500.00 |
| Gross margin | 38.46% |
| Markup | 62.5% |
| Net profit | 2,000.00 |
| Net margin | 30.77% |
Takeaway: The same £2,500 of profit is a 38.46% margin and a 62.5% markup. To reach a 45% gross margin on the same £4,000 of cost you would have to quote £7,272.73 — not £5,800, which is what adding 45%
to the cost would have given you.
What counts as cost
vs overheads
The calculator separates them for a reason:
Direct cost (Cost field)
Include: Subcontractor invoices, stock assets, licences bought for this job, print/fabrication, hardware resold to client, payment-processing fees on the amount you collect.
Rule: Anything you would not have spent if this project had not existed.
Overheads (separate field)
Include: Software subscriptions, rent, insurance, professional indemnity, accounting fees, equipment depreciation, unbillable hours (proposals, admin, chasing payments).
Rule: Costs that exist regardless of this specific project.
Gross margin tells you whether the job was priced correctly. Net margin tells you whether the business works.
Pass-through costs compress percentages (this is normal)
Studios that resell media spend, print, or hardware run structurally lower gross margins because the pass-through inflates both revenue and cost by the same amount. Example:
| Scenario | Revenue | Cost | Gross margin |
|---|---|---|---|
| Pure service (no pass-through) | 10,000 | 3,000 | 70% |
| Same service + £20k media pass-through | 30,000 | 23,000 | 23.3% |
The business is not worse — the percentage is just compressed. Track net profit in currency, not just margin %, when pass-throughs are involved.
Two habits that keep the figure honest
- 1Price forward from the margin you need. Divide cost by (1 − target margin). Never multiply cost by (1 + target margin). The Margin Calculator shows the correct price in its results panel as you type.
- 2Re-run after delivery with actual hours. The gap between quoted margin and delivered margin is the single most useful number a small studio can track — it tells you which kind of project to stop taking.
Should your own salary count as a cost?
- For gross margin: No. Your time is what you are selling.
- For realistic net margin: Yes. Put a market salary for the hours you personally worked into
Overheads
. Otherwise the business looks profitable only because you are working for free.
Payment processing fees belong in Cost
At ~2.9% + fixed fee, they scale with the invoice and can consume a tenth of a thin margin. Include them before you agree to a discount.
Related guides
- How to Price a Project: From Costs to Quote
- Gross Margin vs Net Margin: Which One Tells the Truth?
- Tax Exclusive vs Tax Inclusive: The Mistake Everyone Makes
- Late Payment Interest: Simple vs Compound, Grace Periods, and Flat Fees
Try the calculator
Open the Profit Margin Calculator on the homepage. Enter your cost and revenue — it shows gross margin, markup, net margin, and the correct price for your target margin instantly.
These figures are estimates for planning and quoting. They are not accounting advice, and do not account for income tax, corporation tax, or currency conversion on cross-border work.