Is there a difference? You bet, and understanding the difference between these confusing terms may impact the profit you make on your project. Let’s define the terms and do a quick calculation to see the difference between the two pricing concepts.
Markup
Markup is the difference between the cost of your project and the selling price.
Markup is calculated by adding a percentage of the project cost to the project cost to determine the sale price. Assume the cost of an hourly rate of $100 and we use a 25% markup to determine the sale price.
Sale Price = hourly rate + (hourly rate * markup %)
Sale Price = $100 + ($100 * .25%) = $125
Margin
Gross margin is the difference between the cost of your project and the profit.
Margin is calculated by dividing the hourly rate by 1 – the desired margin.
Assume you want a 25% on on your $100 hourly rate, margin is calculated like this:
Sale Price = hourly rate / (1 – margin %)
Sale Price = $100 / (1 – 25%) = $133.33
See the difference between the two calculations. It doesn’t look like much, but using the wrong calculation could significantly impact the profits you expect on make on large projects.
By the way, you can use reverse this formula to determine the gross margin on your projects. As before let’s assume your cost is $100 per hour and your billing rate is $140 per hour. What is your gross margin?
Gross Margin = (sale price – cost) / sale price
Gross Margin = ($140 – $100) / $140 = 28.5%