Gross margin divides gross profit by the selling price. Markup divides gross profit by direct cost. To price for a target margin, divide direct cost by one minus the target margin—not by adding that percentage to cost.
Start with gross profit per sale
Gross profit is the selling price left after the direct cost of delivering one sale. The direct-cost estimate should include the costs that change because the sale happens: materials, direct labor, subcontractors, card fees, marketplace fees, shipping, packaging, and similar delivery costs.
The current IRS guide for small businesses describes gross profit as net receipts minus cost of goods sold. Your decision model may also need delivery costs that accounting records elsewhere. Keep a written list of what the input includes.
Use the right denominator
Markup = gross profit ÷ direct cost
Suppose a job costs $60 to deliver and sells for $100. Gross profit is $40. That $40 is 40% of the price, so gross margin is 40%. It is 66.7% of the $60 cost, so markup is 66.7%.
Both percentages are correct. They answer different questions. Margin asks what share of revenue remains after direct cost. Markup asks how much was added relative to cost.
Convert a margin target into a selling price
If the target is expressed as gross margin, subtract it from 100% and divide cost by what remains. Adding the target percentage to cost calculates a markup instead.
With a $60 direct cost and a 40% margin target, the target price is $60 ÷ 0.60, or $100. Adding 40% to the cost would produce an $84 price and only a 28.6% gross margin.
Walk through the calculator example
| Input or result | Default example | What it means |
|---|---|---|
| Direct cost | $60 | Cost caused by one sale |
| Selling price | $100 | Customer price before sales tax |
| Gross profit | $40 | Amount left before overhead |
| Gross margin | 40% | $40 divided by $100 |
| Markup | 66.7% | $40 divided by $60 |
| 40% target-margin price | $100 | $60 divided by 60% |
Check what gross margin still has to pay for
Gross profit is not net profit. It still has to cover rent, software, insurance, administrative wages, owner compensation, interest, taxes, rework, idle time, and other overhead. A target margin is useful only when it connects to the business's cost structure and profit goal.
- Recalculate direct cost when labor rates or supplier prices change.
- Test normal waste, returns, discounts, and payment fees.
- Compare the required price with real customer and competitor evidence.
- Use a break-even model to test whether total gross profit covers fixed costs.
Pressure-test the price before using it
Run a base case and a less favorable case. Increase direct cost, reduce billable volume, or include a channel fee that was previously missed. If the market will not accept the resulting price, the options are to reduce cost, change the offer, accept a lower margin deliberately, or stop selling work that cannot support the business.
This guide is educational planning information, not accounting, tax, legal, financial, or pricing advice.