Updated
Markup % = (price − cost) ÷ cost × 100
Markup is the amount added to the cost of a job or product to arrive at the price you charge, expressed as a percentage of cost (not of the selling price). The formula is: Markup % = (Price - Cost) / Cost x 100. Markup is often confused with gross margin, which is the same dollar profit expressed as a percentage of the selling price instead of cost — for any positive profit, the markup percentage is always higher than the margin percentage (a 100% markup is a 50% margin).
Examples use made-up numbers. Education only, not tax, legal or investment advice.
The setup
Illustrative example: a contractor's materials and labor cost $800 for a job.
The $320 difference is gross profit on that job.
The math
They want a 40% markup, so Price = $800 x 1.40 = $1,120.
Note that a 40% markup corresponds to roughly a 28.6% gross margin ($320 / $1,120), not 40% — a common source of underpricing when owners mix the two terms up.
Owner question to ask: "Am I pricing by markup or by margin, and does my spreadsheet or point-of-sale system label it correctly?" Many pricing tools default to one convention silently, and using the wrong one in reverse can shrink real profit by several points without the owner noticing.
Unique caveat: markup percentages that work for one job size may not scale. A 40% markup on a $500 job and a 40% markup on a $50,000 job produce very different dollar cushions for fixed overhead, so markup alone does not guarantee the business covers its indirect costs — it must be checked against actual overhead absorption and break-even volume. Rounding the markup percentage to a whole number for simplicity can also compound into meaningful pricing drift across many invoices.
This definition is educational and does not replace advice from a licensed accountant or tax professional familiar with your specific books. Owners should confirm treatment with their bookkeeper before using this figure in a loan application, valuation, or tax filing. Small differences in chart-of-accounts setup can change how this number is calculated, so consistency period over period matters more than precision in any single month.
Continue with the full explainer lesson.
Definition source
IRS — Retail Industry Audit Technique Guide, Markup Method compares retail selling prices with product costs to determine markup. Our pricing formula is (selling price − cost) ÷ cost × 100. This is arithmetic, not a recommended markup rate.
Questions owners ask
Is a 40% markup a 40% margin?
No. A cost of $800 priced at $1,120 has $320 gross profit: 40% markup and about 28.6% margin.
Which cost should I use for markup?
Use a documented cost definition that includes the costs you intend to recover. Keep it consistent across quotes.
Does a markup guarantee profit?
No. Other business costs, discounts, cost changes and customer demand remain outside that simple calculation.