If you’ve ever said “we aim for 50%” and still missed profit, chances are sales meant markup while finance meant margin. This guide clears that up, shows you how to price from targets, and fixes the mistakes that quietly kill profit.
1) Start with definitions (plain English)
- Gross margin % = (Selling price − Cost) ÷ Selling price × 100.
It tells you how much of each £1 of price is left to pay overheads and profit. Xero - Markup % = (Selling price − Cost) ÷ Cost × 100.
It tells you how much you added on top of cost to build your price. Xero
Same profit £, different denominator. Margin divides by price; markup divides by cost. (Xero’s glossary explains the distinction clearly.) Xero
Tiny example: Cost £80 → Price £100 → Profit £20
→ Margin 20% (20/100) and Markup 25% (20/80). Xero
Margin ↔ Markup quick reference
| Gross margin | Markup |
|---|---|
| 20% | 25% |
| 33.3% | 50% |
| 40% | 66.7% |
| 50% | 100% |
Internal links: see our core finance formulas (Pillar D) for GP, margin %, EBIT and days-based metrics; and our Gross margin guide for targets and levers.
2) Build a price from a target
- From a target margin (m):
Price = Cost ÷ (1 − m)
Example: Cost £600, target margin 40% → Price = 600 ÷ 0.60 = £1,000. - From a target markup (u):
Price = Cost × (1 + u)
Example: Cost £600, target markup 66.7% → Price = 600 × 1.667 ≈ £1,000.
Which to use? Many teams quote with markup (simple), but set targets and report in margin (board packs). Use both—just convert so sales and finance speak the same language. Xero
3) Align quoting with reporting (stop the “50% mix-up”)
If sales are told to “aim for 50%” and they use markup, finance will see 33.3% margin and targets will be missed. Decide the house standard (we recommend margin for targets, markup for quoting calculators) and put the conversion inside your rate card templates.
Internal link: our Gross margin guide shows how a two-point margin lift can add 20% to EBIT on the same revenue.
4) Discounts, VAT and UK compliance (the quick bits you can’t ignore)
- VAT on discounts: For straightforward discounts (“10% off”), you charge VAT on the discounted price. Quote and invoice accordingly. GOV.UK
- Prompt-payment discounts (background): HMRC’s approach aligns VAT with the consideration actually received—not the undiscounted list price. GOV.UK
- Price/savings claims in ads & websites:
The CAP/ASA rules say price claims must not mislead (e.g., “from”/“up to” must reflect real availability). The CTSI Guidance for Traders on Pricing Practices (updated Aug 2025, reflecting the DMCC Act 2024) is the current reference for “Was/Now”, RRPs and similar. If you quote savings, make sure they’re genuine and well-evidenced. Business Companion
Discount-impact box (copy this into your playbook):
Price £1,000, Cost £600 → 40% margin.
Knock 10% off price (to £900), cost unchanged → margin = £300/£900 = 33.3%.
A “small” 10% discount cut your margin by 6.7 percentage points.
5) Set your rate card (service SMEs)
- Minimums & tiers: Establish minimum fees and tiered options; index annually (contract clause).
- Fixed vs time-based: Fixed fees for defined scopes; time-based for uncertainty, but cap and review.
- Scope boundaries: Write change-order rules; never discount without de-scoping.
- Value for advisory: For consulting/advisory work, use value-based pricing where appropriate (ICAEW discusses why value should lead for advisory). ICAEW
6) Price-rise playbook (without churn)
- Add a price-rise line in your engagement letter (annual indexation).
- Give notice + options (hold scope / upgrade / reduce scope).
- Explain the value delta (outcomes, responsiveness, senior time), not just cost inflation.
- Move legacy clients to the current rate card in stages, don’t run a two-tier world forever.
7) Common traps that quietly kill profit
- Treating account management as delivery when it’s not in scope
- “All-inclusive” bundles with variable effort and no change-order
- Contractor creep (swapping internal delivery for subs, but not repricing)
- Rounding prices down to tidy numbers (then discounting on top)
- VAT mistakes on discounts or savings claims that wouldn’t pass ASA/CTSI scrutiny ASA
FAQ (PAA-aligned)
Q1) Margin vs markup, what’s the difference (and why it matters)?
Margin divides profit by price; markup divides profit by cost. Same job can show 20% margin yet 25% markup—plan which you use where, and convert consistently. Xero
Q2) Should we quote with or without VAT?
For consumer-facing offers you must show the VAT-inclusive price. For B2B quoting you can show net values, but your invoice must apply VAT correctly, especially when discounts apply. GOV.UK
Q3) How do discounts affect margin?
They bite harder than most teams expect. See the Discount-impact box above; even a 10% cut can wipe 6–7pp off margin.
Q4) What’s a sensible target margin for services?
Directionally: agencies often target ~50% GP; well-run consulting/advisory can reach 60%+ but model, utilisation and scope discipline matter. See our Gross margin guide for worked numbers and levers.
Q5) Does utilisation matter to pricing?
Yes. Poor utilisation pushes you to under-price to “win work”, then over-service to fill time. Fix utilisation and you strengthen your position to hold target margins (see Gross margin guide for the operating levers).
Ready to align pricing with profit?
Book a 20-minute planning call and we’ll set a realistic target margin, bake the conversion rules into your rate card, and design a price-rise policy that sticks, without churn.