Markup vs Margin

Markup and margin are two different ways of expressing the relationship between cost and price, and confusing them leads to pricing errors. Markup is the percentage you add to your cost to determine price. Margin (or profit margin) is the percentage of the selling price that represents profit. The same numbers produce different percentages depending on which you're calculating—and the difference matters significantly at scale. Markup is calculated as: (Price - Cost) / Cost. If something costs $80 and you sell it for $100, your markup is ($100 - $80) / $80 = 25%. You've added 25% to your cost. Margin is calculated as: (Price - Cost) / Price. For the same numbers: ($100 - $80) / $100 = 20%. Your profit margin is 20%—20% of the selling price is profit. Why does this matter? If you want a 25% profit margin and you incorrectly use markup math, you'll underprice. A 25% margin means that for every dollar of revenue, 25 cents is profit. If your cost is $75 and you want 25% margin, the price must be $100 (because $25 profit / $100 price = 25%). But if you mistakenly add 25% markup to $75, you get $93.75—and your actual margin is only 20% ($18.75 / $93.75). The pricing is wrong. For agencies, this applies when you're adding a markup to subcontractor costs, cost of goods, or other pass-through expenses. If you want to maintain a 30% margin on subcontracted work, you need to price correctly—not just add 30% to cost (which would be 30% markup and only ~23% margin). The formula for price given desired margin is: Price = Cost / (1 - Margin). For 30% margin: Price = Cost / 0.7. Common mistakes include using "markup" and "margin" interchangeably (they're not the same), targeting a margin but pricing with markup math (underpricing), and not understanding which number you're actually achieving (tracking one but thinking you're tracking the other). The most successful agencies know the difference, use the correct calculation for their pricing goals, and verify that their actual margins match their targets.