When it comes to pricing, there can be a lot of confusion around what markup actually is and how it should be used…
Put simply, Markup refers to the percentage by which the direct costs of a job (i.e., labour, material, etc.) are increased (or ‘marked up’) to determine the final price for the job.
And this markup percentage is calculated based off a pre-defined Gross Profit Margin Target for the job (i.e how much Gross Profit you actually want to make on the job!)
The formula to calculate markup is…
Markup = Gross Profit Margin Target/(1 - Gross Profit Margin Target) *100
For example, if you want a gross profit margin of 30%, then your markup would be…
Markup = 0.3/(1 – 0.3) * 100 = 43%
So, if you have $1,000 in direct costs for the job, you’d quote the job…
Quoted Price = Direct Job Costs + (Direct Job Costs * Markup)
Quoted Price = $1,000 + ($1,000 * 0. 43) = $1,430
Now, let’s double check the markup is right…
Gross Profit Margin = ($1,430 - $1,000) / $1,430 = 30%
You see, markup is just a tool to help you price your jobs! Nothing more, nothing less…
DISCLAIMER: The example I’ve used above is a VERY simple example of using a ‘markup’ to price a job. Depending on how you currently price your work, it may not be as simple as this OR you might use a completely different approach altogether. However, the understanding of WHAT markup is and HOW it should be used remains the same!
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I trust you’ll find it valuable!
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