Professional services
Gross Margin Calculator
Works gross margin, which is not the same number as markup.
Result
Markup is measured against your cost, margin against the price you charge. A 50% markup is a 33.3% margin, not a 50% one. Pricing off the wrong one is the most common way a job that looked profitable turns out not to have been. Gross profit is what is left after the cost of doing the job. Overhead comes out of that: the building, the office wages, the vans, insurance, software and advertising. A healthy gross margin still loses money if overhead is larger.
Get a Free Business AuditHow the calculation works
Revenue less cost of goods sold, expressed as a percentage of revenue. Markup, by contrast, is the same dollar difference expressed as a percentage of cost, which makes it the larger number for any given price. Both are shown here because confusing them is the most common and most expensive arithmetic error in small business pricing.
What moves the number
- What is included in cost of goods sold against what sits in overhead.
- Whether labour is treated as direct cost or as overhead.
- Discounting, which comes straight off margin.
- Product or service mix, where margins differ by line.
Where this one goes wrong
A 50% markup is a 33.3% margin, and applying a markup while expecting the matching margin leaves you a third short on that line. Price from margin by dividing cost by one minus the margin. The other thing worth being consistent about is what goes into cost of goods sold: moving labour between direct cost and overhead changes gross margin dramatically without changing the business, so comparisons against benchmarks or across periods need the same definition on both sides.
Before you quote
- Price from margin by dividing cost by one minus the margin.
- Keep the cost of goods sold definition consistent across periods.
- Track margin by line, since a blended figure hides weak ones.
Questions
About this calculator
What is the difference between margin and markup?
Both describe the same dollar difference. Margin expresses it as a share of the price, markup as a share of the cost, so markup is always the larger number. A 50% markup is a 33.3% margin, and treating them as interchangeable loses a third of the intended margin.
How do I price to hit a target margin?
Divide cost by one minus the margin. For a 40% margin, cost divided by 0.6. Adding 40% to cost gives a 28.6% margin instead, which is the error that quietly erodes profitability across an entire price list.
Should labour be in cost of goods sold?
In a service business, direct labour on the job usually belongs there, with supervisory and administrative time in overhead. What matters more than the choice is consistency, since moving labour between the two changes gross margin dramatically without changing anything real.
The formula
margin = (price - cost) / price; markup = (price - cost) / cost
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How to use this calculator
- Price charged ($). Enter your own figure; the page starts at $2,600.
- Direct cost ($). Enter your own figure; the page starts at $1,100.
The result updates as you type, so you can try a figure, see what it does to gross margin, and change it back. Nothing you enter is sent anywhere or saved.
A worked example
These are the figures the calculator opens with. Every number in the results column below is produced by the same calculation the page runs, so you can follow it through before putting your own figures in.
What goes in
| Input | Value |
|---|---|
| Price charged | $2,600 |
| Direct cost | $1,100 |
What comes out
| Result | Value |
|---|---|
| Gross margin main result | 57.7% |
| Gross profit | $1,500 |
| Same thing as a markup | 136% |
That job earns $1,500 of gross profit, a 57.7% margin. The same job described as a markup is 136%.
How sensitive the answer is
Holding everything else steady and changing only price charged, this is what happens to gross margin. It is worth knowing which of your inputs the answer actually hinges on, and which barely move it.
| Price charged ($) | Gross margin |
|---|---|
| $1,300 | 15.4% |
| $1,950 | 43.6% |
| $2,600 example above | 57.7% |
| $3,900 | 71.8% |
| $5,200 | 78.8% |
Every other input is held at the example value while this one changes, which is not how a real job behaves. Treat it as a guide to which number matters most, not as five separate quotes.
What each figure means
- Price charged ($)
- A money amount, starting at $2,600.
- Direct cost ($)
- A money amount, starting at $1,100.
What the results tell you
| Result | What it is |
|---|---|
| Gross margin | The headline result. A percentage. |
| Gross profit | A money figure. |
| Same thing as a markup | A percentage. |
Estimating is the easy part
The jobs you never hear about cost more than the ones you mis-measure. BDEVY builds the marketing, systems and automation that bring them in.