Markup

In order to calculate an accurate profit on any goods or services you might be in the business of selling or contracting, you need to apply the percentage of profit in the right place and in the right way. Far too many business people, contractors, and their employees don’t understand the difference between profit margin and markup. They make the mistake of thinking that making a 20% profit on a service that costs $200 means to simply [multiply the selling price ($200) by (1.20) equaling $240.00] and you will make a 20% profit. This is not correct. Profit margin is “what percentage of the price is profit”, while mark-up is the “what percentage above the break-even cost of goods”.

Markup is the amount that is added to the cost price of goods to cover overhead (the cost of doing business) and profit. It's the difference between the selling price and the cost and is mostly expressed as a percentage over the cost.

Calculating Markup

Markup = Selling Price - Cost

Markup Percentage = Sales Price - Unit Cost x 100

Unit Cost

Example: If your cost is $100,000 and your selling price is $115,000:

Markup percentage = ($115,000 - $100,000) / $100,000 x 100

= $15,000 / $100,000 x 100

= 15%

Don’t confuse markup % with profit %. Your profit is a percentage of the selling price, not a markup on the cost.

Calculating Your Selling Price

You can't determine the selling price for a job unless you have estimated your break-even cost. Use the following formula to calculate your selling price based on desired profit %:

Selling Price = Break-Even Cost/(100%-Profit%)

Example: If the break-even cost of a job is $100,000 and your desired profit is 15% of selling price:

To get 15% profit on a job that has a break-even cost of $100,000, you must divide $100,000 by (100%-15%) or $100,000/.85 to determine the selling price of $117,650.

Break-Even $100,000—85

Profit $ 17,650—15

Selling Price $117,650—100%

There is a “short cut” to work it out:

For a five percent profit, divide the cost price by 0.95, which is (100-5)/100

For a ten percent profit, divide the cost price by 0.9

For a fifteen percent profit, divide the cost price by 0.85

For a twenty percent profit, divide the cost price by 0.8, and so on.

If a 15% profit is desired, then do not simply multiply your cost price by 1.15 (mistakenly) thinking that you're adding 15%. If you did this, your markup on cost would be 15%, but you would only be getting 13% profit on your selling price, as demonstrated below:

Selling Price when multiplied by 1.15:

Break-Even $100,000—87%

Profit $ 15,000—13%

Selling Price $115,000—100%

A true 15% profit example using the 'shortcut' mentioned above:

Break-Even $9,500

Profit Desired 15%

Selling Price $11,176.50 (9,500 / .85)

By using the formula correctly, you will see that a profit of 15% of the selling price is greater than a 15% markup on cost.

Keep in mind that your profit margin percentage can vary slightly from job to job. For example, if you have two jobs valued at $6000 and $100,000 (respectively) that can be completed in the same amount of time with the same number of employees, the overhead on both will be the same. The $6,000 job will have more overhead cost per dollar of revenue than the $100,000 job so the percentage may need adjusted to provide a competitive price while still ensuring you make money.

You should always price your jobs so that your net profit (after taxes) is at least 10%. This would mean that as the owner you get paid $150,000 for managing $1.5 million dollars of work. This may sound like a lot of money, but you will be working hard for many hours to achieve this and deserve to get paid for your work.

The above content is extracted from Mike Holt's Business Management Skills program.

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Mike Holt is an author, businessman, educator, speaker, publisher and National Electrical Code? expert. He has written hundreds of electrical training books and articles, founded three successful businesses, and has taught thousands of electrical code seminars across the US and internationally. His company, Mike Holt Enterprises, has been serving the electrical industry for over 40 years, creating and publishing books, DVDs, online training and curriculum support for electrical trainers, students, organizations, and electrical professionals. 

Mike has devoted his career to studying and understanding the National Electrical Code and finding the easiest, most direct way to share that knowledge with others. He has taught over 1,000 classes on over 40 different electrical-related subjects to tens of thousands of students. His knowledge of the subject matter, coupled with his dynamic and animated teaching style, has made him sought after from companies like Generac, IAEI, IBEW, ICBO, NECA, and Fortune 500 companies such as IBM, Boeing, Motorola, and AT&T. He is a contributing Editor for Electrical Construction and Maintenance Magazine (EC&M) and formerly Construction Editor to Electrical Design and Installation Magazine (EDI). His articles have been seen in CEE News, Electrical Contractor (EC) International Association of Electrical Inspectors (IAEI News), The Electrical Distributor (TED) and Power Quality Magazine (PQ).