How Much Markup Should I Charge? A Guide for Small Business Owners
Pricing is one of the most important parts of starting your business. Set your prices too low and you’ll lose money. Set them too high and you could miss out on clients.
That’s where markup comes in. Markup is one of the most important parts of your pricing because it determines how much you charge the customer after you factor in your total costs and determines your profit margin.
In this guide, we’ll help you understand how to calculate markup in order to use the best pricing model for your business.
In this resource, we’ll focus on markup and answer questions like:
What is markup?
Markup is how much more money you charge for a product or service after costs to help ensure a stable profit. It can be measured as a dollar amount or a percentage.
What’s an example of markup?
For example, let’s consider fertilizer for a lawn service business.
Say you purchased the fertilizer through a wholesale supplier, and it cost you $10 a bag. Then you charge your client $25 for the fertilizer. The markup is the difference between the material cost to you ($10), and the amount you charged to the customer ($25). In this case, the markup is $15, or 150%.
Markup can be applied to both products and services and can even vary per client or job.
While it’s good to have a standard markup price, you can have some wiggle room.
For example, if a lawn care client has a huge yard and needs a lot of fertilizer, you could potentially offer them the fertilizer at a discounted price while still making money.
The key here is to know your profit margins (the percentage of income your business keeps after other expenses, like materials and labor) well enough to ensure that you’re still making money (or breaking even) when you do this.
I typically find a middle ground between what I pay and what the customer would pay if they just walked in to buy it themselves.
So they’re still getting a deal with buying it through me, but I’m still making more money than I paid for it.
What’s the difference between profit margin and markup?
Profit margin is the amount you take home after deducting the costs for the job (labor, materials, and overhead).
Markup is the difference in price between your costs and what you charge a client to help maintain or boost your profits.
For example, let’s say you completed a job and you charged the client $500, but the job only cost you $400 to complete.
Your profit margin would be $100, or 20%
Your markup in this instance would be $100, or about 25%.
Both markup and profit margin can affect each other. If material costs are unusually high for a job, it can negatively affect your profit margin on a specific project. If you underestimate labor costs, this can also negatively affect your profit margins.
Likewise, if material costs and labor costs are low, you could see a positive change to your profit margin.
READ MORE: 5 ways to increase your profit
Strike a healthy balance between the two
Evaluate your markup too low, and your profit margins may not be high enough to sustain your business.
Evaluate your markup too high, and clients may choose to find a more affordable service provider who has a lower markup.
Use markup and profit margin to set these values
You can use your profit margin to inform your markup. This can help to keep your pricing in check.
For example, if you set a goal to have a profit margin of, say, 30%, then work backwards to know how much you need to make from each job (on top of material costs) to reach that goal (roughly 40%).
Markup on your products and services can help you to stay within a comfortable profit margin range. It can also ensure that you’re making a fair profit from each job as well.
How much should my markup be?
The amount of markup you charge really depends on your business, the market, and your profit margin goals. The good news is that profit margins and markups correlate in a very predictable way.
So, if you know your profit margins (or what you want them to be), you can easily determine your markup.
For example, if you’re aiming for a 40% profit margin, you can see that you need to charge about a 70% markup on your product or service.
Alternatively, if you want a 50% profit margin, you need to have a 100% markup.
Use this chart to roughly determine the markup estimate that fits your profit margin goal:
| Markup | Profit Margin |
|---|---|
| 10% | 9% |
| 20% | 17% |
| 30% | 23% |
| 40% | 29% |
| 50% | 33% |
| 60% | 37% |
| 70% | 41% |
| 80% | 44% |
| 90% | 47% |
| 100% | 50% |
More tips for setting markups
You know the markup you want in order to reach your profit margin goals, but staying consistent in your pricing model is something that requires attention and flexibility. Here are some more tips to set the right markup:
- Know your costs: Leave no stone unturned when figuring out how much it costs to run your business and perform a job—include labor costs, material costs, overhead costs and any other expenses you incur such as licenses and permits, and insurance
- Research competitors: Understand the price point of other service providers will help you stay competitive with your pricing model and standard markup
- Adjust regularly: Keep your finger on the pulse of the cost of materials and market conditions and allow your markup to change based on your business needs
- Use a markup calculator: Jobber’s service price calculator will help you set and adjust your pricing model and standard markup price in real time.
READ MORE: Create a small business budget fast
How to calculate markup
Calculating markup is relatively straightforward once you know how much you need to charge.
In order to do that, you need to factor your total costs into your pricing model to start:
- Cost of labor
- Material costs
- Overhead costs
- Other expenditures
Total cost = Labor + material costs + overhead costs + other expenditures
Then, use the chart above to determine how much your markup should be in order to meet your profit margin goal. Once you have an ideal profit margin, you know how much you need to charge over and above material and labor costs to get to it.
Let’s say you have a 50% profit margin goal. That means that you need a 100% markup on your product or service. If your base costs were $100, a 100% markup would mean that you charge $200 total.
Example markup calculation
A handyman is fixing a leaky faucet. Here’s the breakdown of total costs and how to calculate the markup:
- Labor costs: $50
- Material costs: $30
- Overhead costs: $20
- Other expenditures: $10
Total costs: 50+30+20+10 = $110
Target markup: The handyman wants to apply a 40% markup.
Markup calculation:
Selling price = Total costs + (Total costs x markup percentage)
Selling price = 110 + (110 x 0.40)= 110 + 44 = $154
The handyman will charge the customer $154 for the service.
There are also other factors that you’ll want to be prepared for with your standard markup pricing in order to stay flexible and ensure consistent profit. These include:
- Total cost fluctuation: If any of your expenses increase, you may need higher markup to keep pace with your profit margin goals
- Market demand: If your services are in demand, you may have leverage to in increase your markup
- Competition: If you trying to win business in a very competitive market, you may want to lower your markup to offer a better price to potential customers
- Type of business: Depending on your services or product offering, you may have different average markup.
It’s a good idea to work out a few models for this to help you understand the flexibility of your markup values. So if you’d like to charge less or more, you understand the impact it has on your business.
Pro Tip: Use Jobber’s job costing software to keep track of your all your costs for each job in one place.
How do I figure out what my current markup percentage is?
To start, you’ll need to know your:
- Revenue: The income dollar amount you’ve generated from operating your business, selling goods, and selling services.
- Total cost: The total cost to run your business and provide services—includes labor costs, material costs, overhead costs and any other additional expenses
- Gross profit: The profit made after deducting total cost
First, take your revenue and subtract your total cost. This will give you your gross profit.
Gross Profit = Revenue – Total cost
Then, to get your markup, divide your gross profit by your total cost to get the dollar amount. To turn it into a percentage, just multiply it by 100.
The markup percentage formula goes like this:
Markup = (Gross profit / Total cost) x 100
When I first started, we didn’t really know how to price. I was just making enough just to make money.
I didn’t realize there was insurance, there’s labor, everything that went into the business.
Why is markup important?
Markup is important because it helps you to ensure that you’re making enough money to not only stay afloat, but to grow and expand.
For example, with the money made on markup, you can invest money in your business by:
- Sourcing better talent
- Offering better salaries to your team (and yourself)
- Training employees
- Buying benefits programs for your team
- Marketing your business
- Buying better equipment and materials
- Using field service software
Although it can change based on several different things (supply costs, market value, competitors, and even individual jobs), it’s one of the deciding factors in whether you make a profit or not.
By striking a balance within your pricing structure, you can offer your clients and customers fair prices while still making enough to move your service business forward.
Usually about once a year I have someone call around to all of the cleaning companies, or quite a few of the cleaning companies in our area.
I usually set my prices somewhere in the middle.
Understanding how to calculate your standard markup price will help you to be competitive in your industry, earn enough to reach your product margin goals, and continue to grow.
There’s no one-size-fits-all when it comes to markup and profit margin, so set a target that’s right for you and your business and continue to meet the needs of your customers.
Originally published in March 2020. Last updated on August 1st, 2024.