Comparing quotes and pricing
Margin vs Markup: How to Price a Resale Quote Without Mistakes
Margin vs markup is easy to get wrong: both describe your profit as a percentage, so they're easily mixed up. Markup is profit as a share of your cost; margin is profit as a share of your selling price. The same sale always has a higher markup than margin, and confusing the two is one of the most common ways a quote ends up less profitable than planned.
The two formulas
Take an item you buy for $100 and sell for $125. Your profit is $25.
- Markup = profit ÷ cost = $25 ÷ $100 = 25%
- Margin = profit ÷ selling price = $25 ÷ $125 = 20%
Same sale, same $25, two different percentages.
To get a selling price:
- From a markup: price = cost × (1 + markup). $100 × 1.25 = $125.
- From a target margin: price = cost ÷ (1 − margin). $100 ÷ 0.80 = $125.
Converting one into the other
- Markup → margin: margin = markup ÷ (1 + markup)
- Margin → markup: markup = margin ÷ (1 − margin)
| Markup | Margin | Margin | Markup | |
|---|---|---|---|---|
| 5% | 4.76% | 5% | 5.26% | |
| 10% | 9.09% | 10% | 11.11% | |
| 12% | 10.71% | 15% | 17.65% | |
| 15% | 13.04% | 20% | 25.00% | |
| 20% | 16.67% | 25% | 33.33% | |
| 25% | 20.00% | 30% | 42.86% | |
| 50% | 33.33% | 40% | 66.67% | |
| 100% | 50.00% | 50% | 100.00% |
Notice how the gap grows: at 10% the two are close, at 50% markup you only have a 33% margin.
Which one should you use?
Both, for different jobs.
- Markup is the practical way to price. You know your cost; adding a percentage on top is quick and works line by line. That's why most distributors quote "cost plus".
- Margin is how you measure the result. Your accounts, your targets and your comparisons with other businesses work in margin, because it's a share of revenue.
The mistake isn't using markup. It's using a margin target as if it were a markup. If your business needs a 20% margin and you add 20% to cost, you get 16.67%, a shortfall on every line you sell.
Four pricing mistakes that cost resellers money
1. Adding the target margin as a markup. Covered above: to earn a 20% margin, mark up by 25%, not 20%.
2. Forgetting that discounts come out of profit. You mark up a $100 cost by 20% to $120, then give the customer 10% off: the price is $108. Your markup is now 8% and your margin 7.41%, less than half of what you started with. Decide the discount first, or set the markup high enough to absorb it.
3. Counting tax as revenue. Sales tax or VAT is added on top of your price and passed on. If you calculate margin on a price that includes tax, it looks better than it is. Always calculate on the pre-tax amount.
4. Looking only at line percentages. A quote where most lines carry 20% but the two biggest lines carry 5% has an overall margin far below 20%. Check the margin on the whole quote, weighted by value, before you send it.
A quick worked quote
Illustrative figures, three lines, all costs in your selling currency:
| Line | Cost | Markup | Sell | Profit |
|---|---|---|---|---|
| Cable, 120 m | $480.00 | 15% | $552.00 | $72.00 |
| Switchgear, 2 pcs | $2,600.00 | 6% | $2,756.00 | $156.00 |
| Connectors, 300 pcs | $90.00 | 30% | $117.00 | $27.00 |
| Total | $3,170.00 | $3,425.00 | $255.00 |
Overall margin = $255 ÷ $3,425 = 7.45%. The average of the three markups is 17%, but the expensive line at 6% dominates. If your target is 10% margin, this quote misses it, and you can see exactly which line to look at.
Doing this in RFQ Manager
RFQ Manager prices the way distributors do and shows you the result the way your accounts will:
- Markup % per line. In Proposal Studio, each line's selling price is its cost plus your markup: cost × (1 + markup %). Your organization's default markup is filled in for every line, and you change it where needed.
- Cost is the real cost. The cost on each line is the supplier's price after their discount, converted to your proposal's currency at the rate you enter.
- Customer discount after markup, per line, so you see straight away what it does to your profit.
- Tax kept out of profit. The proposal's tax rate is added on top of the line totals and excluded from the profit figures.
- The real margin before you send. The summary shows the total, the margin value (your profit in money), and the overall margin %: profit as a share of the pre-tax total. A 12% markup on every line, with no discounts, shows there as a 10.71% margin, exactly as in the table above.
Summary
- Markup = profit ÷ cost. Margin = profit ÷ selling price.
- Price with markup; measure with margin.
- To hit a target margin m, mark up by m ÷ (1 − m).
- Discounts come out of profit; tax is never revenue.
- Check the overall margin of the whole quote, not just the lines.
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