Ask ten freelancers and small agencies how they price, and a surprising number will say something like: work out the cost, then add 40%. Then they will tell you they make a 40% margin. They do not. Adding 40% to cost is a 40% markup, which is a 28.6% margin. On a year of projects, that gap is real money.
This guide explains the difference between margin and markup, gives you the formulas and a conversion table, walks through pricing a service project from its true cost base, and shows what discounts actually do to your profit. The free Service Pricing Calculator runs the same numbers for your own projects.
Key takeaways
- Markup is profit as a percentage of cost. Margin is profit as a percentage of price.
- To price for a target margin, divide cost by (1 − margin). Do not multiply by (1 + margin).
- A 40% markup is only a 28.6% margin. A 40% margin needs a 66.7% markup.
- Discounts come straight out of profit. At a 40% margin, a 20% discount halves your profit per project.
- Price from a full cost base: the real cost of the hours, plus tools, direct costs and a share of overhead.
Margin vs markup: the formulas
Both measure the same profit, the difference between price and cost. They just divide it by different things.
- Markup % = (price − cost) ÷ cost
- Margin % = (price − cost) ÷ price
- Price from a markup = cost × (1 + markup)
- Price from a margin = cost ÷ (1 − margin)
- Convert markup to margin: margin = markup ÷ (1 + markup)
- Convert margin to markup: markup = margin ÷ (1 − margin)
Because price is always bigger than cost when you make a profit, the margin percentage is always smaller than the markup percentage for the same deal.
Markup to margin conversion table
| Markup on cost | Equals a margin of |
|---|---|
| 10% | 9.1% |
| 20% | 16.7% |
| 25% | 20.0% |
| 33.3% | 25.0% |
| 40% | 28.6% |
| 50% | 33.3% |
| 66.7% | 40.0% |
| 100% | 50.0% |
| 150% | 60.0% |
| 200% | 66.7% |
Notice the bottom half: doubling your cost (a 100% markup) is only a 50% margin, and you can never reach a 100% margin however high the markup goes.
Step 1: build the real cost base
Pricing mistakes usually start before any percentage is applied, with a cost that is too low. For a service project, the cost base has four parts:
- Labour: the hours the project will really take, multiplied by what an hour really costs you. That is not just salary. It includes employer contributions, benefits, and the unbillable time around every billable hour, such as admin, sales and learning.
- Software and tools used for this project: licences, stock assets, hosting, subscriptions you would not otherwise need.
- Other direct costs: subcontractors, travel, printing, anything bought specifically for the job.
- Allocated overhead: this project's fair share of rent, insurance, accounting and equipment.
Take a 40-hour website redesign with a loaded labour cost of $60 an hour. Labour is 40 × 60 = $2,400. Add $250 of software, $350 of other direct costs and $500 of allocated overhead, and the cost base is $3,500.
Step 2: price for the margin you want
Say you want a 40% margin. Divide the cost by (1 − 0.40):
$3,500 ÷ 0.60 = $5,833.33, a profit of $2,333.33, which is exactly 40% of the price.
Now compare the "add 40%" habit. $3,500 × 1.40 = $4,900, a profit of $1,400. That is a 28.6% margin, and $933.33 less profit on this one project. Over twenty projects a year, it is more than $18,000.
Step 3: see what a discount really costs
Clients ask for discounts, and a discount always sounds small. It is not small. Every dollar of discount comes straight out of profit, because the cost of doing the work does not change. Here is the $5,833.33 price under different discounts:
| Discount | Price | Profit | Margin | Profit lost |
|---|---|---|---|---|
| 0% | 5,833.33 | 2,333.33 | 40.0% | — |
| 5% | 5,541.67 | 2,041.67 | 36.8% | 12.5% |
| 10% | 5,250.00 | 1,750.00 | 33.3% | 25.0% |
| 15% | 4,958.33 | 1,458.33 | 29.4% | 37.5% |
| 20% | 4,666.67 | 1,166.67 | 25.0% | 50.0% |
| 25% | 4,375.00 | 875.00 | 20.0% | 62.5% |
At a 40% margin, every 1% of discount removes 2.5% of your profit. A 20% discount halves it, which means you would need to win twice as many projects to earn the same profit. Before agreeing to a discount, decide what you get in return, such as a larger scope, a longer commitment, payment up front or a referral, and set a walk-away floor below which you will not go.
Taxes and fees sit on top
If you charge GST, VAT or a platform fee, it is added to the client's invoice but it is not your money. Keep it out of the margin calculation: price the work first, then add the tax on top. Treating the tax-inclusive total as revenue makes your margins look better than they are.
A simple pricing routine
- Estimate the hours honestly, including revisions and project management.
- Build the full cost base: labour, tools, direct costs and overhead.
- Choose a target margin, and price with cost ÷ (1 − margin).
- Check the result against the market and against the value to the client.
- Decide your discount rules and your floor price before the conversation, not during it.
- After the project, compare the real hours and costs with the estimate, and adjust the next quote.
Run your own numbers
The free Service Pricing Calculator takes the project name, expected hours, hourly labour cost, software and tool costs, other direct costs, allocated overhead, a target margin, an optional tax or fee percentage and a custom discount. It shows:
- the price for your target margin and the profit at that price;
- a discount sensitivity table at 0%, 10%, 20% and 30% plus your custom discount, with the margin and profit reduction for each, rated from healthy margin through to below break-even;
- a price composition chart and a discount-versus-profit view;
- an Excel-compatible XLSX download with live formulas, and a recap image for your records.
Tax or fee is shown as a pass-through addition to the invoice and is kept out of profit and margin. Everything runs in your browser; nothing is uploaded. If you sell units rather than projects, the Break-Even & Sensitivity Model and our break-even guide answer the next question: how many do you need to sell?
Frequently asked questions
Is a 40% markup the same as a 40% margin?
No. A 40% markup on cost gives a 28.6% margin. To reach a 40% margin you need a markup of 66.7%, or you can simply price at cost ÷ 0.60.
How do I calculate a price from a margin in Excel?
With the cost in A2 and the margin as a percentage in B2, use =A2/(1-B2). For a markup instead, use =A2*(1+B2).
What margin should a service business target?
There is no universal number. Work backwards from your overheads and the profit you need, include the risk of overruns, then check the result against what clients in your market pay. What matters is that the margin is a deliberate choice, calculated on price rather than cost.
Should I use margin or markup?
Use whichever you like to set prices, as long as you know which one you are using. Margin is usually easier to reason about because it answers the question "how much of every dollar the client pays do I keep?"
How do I offer a discount without losing money?
Know your floor, the price at which the project still covers its full cost base plus a minimum margin, and trade the discount for something of value, such as a bigger scope, faster payment or a longer commitment.