Pricing and profit

markup vs marginwhat to chargebreak even formulas

Markup, margin, break-even and ROI — the four numbers that decide whether the work is worth doing.

Markup Percentage (on Cost)

m = \frac{P - C}{C}

Markup states profit as a fraction of what the item COST you. A 25% markup on an $80 cost gives a $100 price.

Gross Margin Percentage (on Price)

g = \frac{P - C}{P}

Margin states the same profit as a fraction of the SELLING PRICE. The $80 cost sold at $100 is a 20% margin, not 25% — the classic small-business mix-up.

Markup and Margin Conversion

m = \frac{g}{1 - g}

Converts directly between markup on cost and gross margin on price. A 50% markup is a 33.3% margin; a 20% margin is a 25% markup.

Break-Even Quantity

Q = \frac{F}{p - v}

Units that must be sold before fixed costs are covered: fixed cost divided by the contribution margin, price minus variable cost per unit.

Return on Investment (ROI)

\mathit{ROI} = \frac{G - C}{C}

Profit expressed as a fraction of what was spent: total value returned minus cost, divided by cost.

How they fit together

Markup and margin are the most expensive confusion in small business, and they are both here on purpose. Markup measures profit against what you paid; margin measures it against what you charged. The same $80 cost sold at $100 is a 25% markup and a 20% margin. Neither number is wrong, but quoting one while budgeting with the other quietly erodes every job.

The classic error runs one way: wanting a 40% margin and adding 40% to cost. That yields a 28.6% margin, and on a $100,000 year it is more than eleven thousand dollars that never arrives. The conversion formula exists to end that argument on the spot.

Break-even quantity then asks the volume question — how many units before the fixed costs are covered — and ROI asks the retrospective one. Together they bracket a decision: break-even before you commit, ROI after you have the numbers.