Markup Is Not Margin!
Why confusing the two can cost your landscape business thousands.
Let's say you're a landscape contractor preparing an estimate for a patio installation. You've calculated your labor, equipment, materials, and the appropriate share of your company's overhead, and you've determined that the project will cost $10,000 to complete.
You want to make a 20% profit. Simple enough, right?
You take your $10,000 cost, add 20%, and arrive at a selling price of $12,000. The customer accepts your proposal. You complete the project, pay your expenses, and have $2,000 left over.
You made your 20% profit.
Or did you?
Well, that depends on what you mean by 20%.
Because a 20% markup and a 20% profit margin are not the same thing. And if you don't understand the difference, you may be making considerably less profit than you think.
Let's take a closer look.
What's a Markup?
A markup is the amount you add to your cost to determine a selling price. It's calculated as a percentage of the cost.
Let's go back to our $10,000 patio installation and apply a 20% markup:
$10,000 × 20% = $2,000
Add that to your cost:
$10,000 + $2,000 = $12,000 selling price
You've added 20% to your cost. That's a 20% markup, and there's nothing wrong with that.
But what percentage of the selling price is actually profit? Let's find out.
What's a Profit Margin?
Profit margin measures profit as a percentage of the selling price.
In our example, the customer paid $12,000. Your total costs were $10,000. That leaves $2,000 in profit. Now divide that profit by the selling price:
$2,000 ÷ $12,000 = 16.67%
Your 20% markup produced a 16.67% profit margin.
You didn't lose money. You didn't necessarily price the job incorrectly. But if you intended to earn a 20% profit margin, you missed your target.
And that difference matters.
A 20% Markup Isn't Necessarily Wrong
Let's clear something up. There's nothing inherently wrong with applying a 20% markup. Or a 15% markup. Or a 40% markup.
The appropriate markup depends on your costs, the services you provide, your market, and the profit you intend to earn. A contractor who understands that a 20% markup on total cost produces a 16.67% profit margin may be perfectly satisfied with that result.
The problem isn't the markup.
The problem is believing that a 20% markup automatically produces a 20% profit margin.
Those are two different calculations, and the difference between them can be significant.
Let's Look at the Difference
Suppose you want to achieve a true 20% profit margin on that same $10,000 project. This time, instead of adding 20% to your cost, you need to calculate a selling price that leaves 20% of the revenue as profit.
Here's the formula:
Selling Price = Total Cost ÷ (1 − Desired Profit Margin)
For our project:
$10,000 ÷ (1 − 0.20) = $10,000 ÷ 0.80 = $12,500
Now let's check the math.
20% Markup | 20% Profit Margin | |
Total project cost | $10,000 | $10,000 |
Selling price | $12,000 | $12,500 |
Profit | $2,000 | $2,500 |
Actual profit margin | 16.67% | 20% |
That's a $500 difference on one relatively small project. And the only thing that changed was how you calculated the selling price.
What Happens on Larger Projects?
Now suppose you're estimating a $100,000 landscape installation. You intend to achieve a 20% profit margin, but you mistakenly apply a 20% markup instead.
20% Markup | 20% Profit Margin | |
Project cost | $100,000 | $100,000 |
Selling price | $120,000 | $125,000 |
Profit | $20,000 | $25,000 |
That's a $5,000 difference. Now imagine making that same mistake across ten similar projects. You could be leaving $50,000 in potential profit on the table.
Not because you worked inefficiently. Not because your employees made mistakes. Not because your equipment broke down. But because you confused two simple financial terms.
And here's the interesting part: you might never realize it.
Your jobs are selling. Your crews are busy. Your customers are happy. And your business is making money.
Just not as much as you intended.
Markup and Margin: A Quick Reference
Here's a simple comparison showing how different markups translate into actual profit margins, assuming all costs have been included.
Markup on Total Cost | Actual Profit Margin |
10% | 9.09% |
15% | 13.04% |
20% | 16.67% |
25% | 20.00% |
30% | 23.08% |
40% | 28.57% |
50% | 33.33% |
Notice that the profit margin is always lower than the markup percentage. That's because the markup is based on cost, while the margin is based on the higher selling price. And the larger the markup, the wider the gap between the two percentages.
So Which One Should You Use?
Both.
Markup is a useful tool for calculating selling prices. Profit margin is a useful tool for evaluating profitability. Many contractors use markups when preparing estimates because they're relatively easy to apply, and there's nothing wrong with that.
The important thing is knowing what those markups actually produce.
For example, if you want a 20% profit margin, you can calculate the equivalent markup. A 20% margin requires a 25% markup on total cost. Here's how:
Required Markup = Desired Margin ÷ (1 − Desired Margin)
20% ÷ 80% = 25%
So if your total project cost is $10,000, adding a 25% markup produces a $12,500 selling price and a 20% profit margin.
Simple. But you have to know which number you're working with.
Don't Forget Overhead
There's one important consideration before you start calculating profit. Everything we've discussed assumes that you've accounted for all the costs associated with completing the work and operating your business.
That includes direct project costs such as labor, equipment, materials, and subcontractors, as well as the appropriate share of your company's overhead — expenses such as office operations, insurance, administration, estimating, and management.
If you're calculating a margin using only direct project costs, the amount remaining isn't necessarily operating profit. Some of it still has to pay for the expenses of running your company. (The phone bill doesn't care how good your margins looked on paper.)
You can't accurately calculate an operating profit margin if you haven't accounted for your overhead.
We'll leave the details of calculating and recovering overhead for another discussion. For now, just remember that your pricing must account for the full cost of doing business before you can determine what you're actually earning.
A Simple Way to Remember the Difference
When you're estimating a project, keep these two questions in mind.
Markup asks: How much am I adding to my cost?
Margin asks: How much of my selling price will remain as profit?
They're related, but they're not interchangeable. And when someone tells you their company makes a 20% profit, it's worth asking whether they're talking about markup or margin — because those two answers can describe very different financial results.
Know Your Numbers
I believe one of the most important things a landscape contractor can do is understand the numbers behind the business. Not just how much a project costs. Not just how much the customer is willing to pay. But how those numbers relate to profitability.
You don't have to be an accountant. You don't need complicated financial software to understand the basic principles. But you do need to know what you're calculating.
If you use markups, understand the margins they produce. If you establish a desired profit margin, calculate the selling price necessary to achieve it. And make sure you've accounted for the full cost of performing the work.
Because the difference between markup and margin isn't just a matter of terminology.
It's a matter of profitability.
The Bottom Line
Let's return to our original $10,000 patio installation.
A 20% markup produces a $12,000 selling price and a 16.67% profit margin. A 20% profit margin requires a $12,500 selling price.
Same project. Same costs. Different financial result.
Markup is what you add to your cost. Margin is what you keep from your selling price after costs.
Understand the difference, and you'll be in a much better position to price your work accurately and build a profitable landscape business. Because the goal isn't simply to sell more work.
The goal is to make money on the work you sell.
~ Eric
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