If your team confuses “margin” and “markup,” you’ll under-quote by 10–20% and wonder why you’re busy but broke. This guide fixes it in minutes, with a conversion table, a tiny calculator, and copy-paste checklists your whole team can use.
For a deeper dive on profitability, see our internal guides: Gross margin for service businesses and Core formulas.
Why this matters for UK service SMEs (5–30+ staff)
Service work is labour-heavy, scope-sensitive, and deadline-driven. When teams use markup (a % on cost) as if it were margin (a % of sales), quotes come in too low and gross margin vanishes. Get the language right → get the pricing right → protect the cash you need for payroll and growth.
Margin vs markup: the definitions (and the one-line formulas)
- Gross margin (%) = (Selling price − Direct costs) ÷ Selling price, tells you profitability relative to sales. Sage
- Markup (%) = (Selling price − Direct costs) ÷ Direct costs, used to build a selling price from cost. Sage
Because margin uses selling price as the base and markup uses cost, the markup % is always higher than the margin % for the same job. Xero
Rule of thumb: Manage the business on margin (profitability target). Use markup only as a tool to reach that margin when building a price.
The classic trap: why 20% margin ≠ 20% markup
Worked example (service job):
Direct cost (fully-loaded delivery cost) = £1,000
- Target 20% margin → Price = £1,000 ÷ (1 − 0.20) = £1,250
- Margin = 20% (by design)
- Implied markup = 25%
- Target 20% markup → Price = £1,000 × (1 + 0.20) = £1,200
- Implied margin = 16.7%
That 3.3-point margin miss is the difference between a healthy month and a barely-break-even one.
Your conversion cheat-sheet (margin → markup)
Use this when someone says “add 30%” do they mean margin or markup? If your target is a margin, here’s the implied markup you must use to hit it.
Formulas you’ll use:
- Implied markup = margin ÷ (1 − margin)
- Price (ex-VAT) = Cost ÷ (1 − margin)
| Target margin | Implied markup | Price = Cost × |
|---|---|---|
| 10% | 11.1% | 1.111 |
| 15% | 17.6% | 1.176 |
| 20% | 25.0% | 1.250 |
| 25% | 33.3% | 1.333 |
| 30% | 42.9% | 1.429 |
| 35% | 53.8% | 1.538 |
| 40% | 66.7% | 1.667 |
| 45% | 81.8% | 1.818 |
| 50% | 100.0% | 2.000 |
| 55% | 122.2% | 2.222 |
| 60% | 150.0% | 2.500 |
| 65% | 185.7% | 2.857 |
| 70% | 233.3% | 3.333 |
Heights Tip: If your quoting tool only accepts markup, set it to the “Implied markup” from the table so you still land on your margin target.
Tiny calculator
What it does: Enter Direct cost (ex-VAT) and Target margin (%) → it returns Price (ex-VAT) and Implied markup (%).
Bonus toggle: Show the VAT-inclusive price at the standard rate of 20%. GOV.UK
Margin ↔ Markup (mini-calculator)
VAT and quoting for B2B services (quick clarity)
- Most UK goods and services use the standard VAT rate of 20%. Use the standard rate unless the supply is reduced- or zero-rated. GOV.UK
- If your ad/website targets consumers, prices should include VAT. You can quote ex-VAT prices only when your audience consists entirely of businesses that pay no VAT or can recover VAT, and you must prominently state the VAT rate or amount (e.g., “ex VAT @20%”).
- If you show both inclusive and exclusive prices, the ex-VAT figure must be clearly addressed to those who can recover VAT and include the VAT rate, not just “ex VAT.”
Reverse-engineering a VAT-inclusive price at 20%: HMRC’s VAT-fraction for the 20% standard rate is 1/6 for the VAT element of a VAT-inclusive amount; therefore the ex-VAT amount is the gross ÷ 1.2 (inferred from the VAT-fraction). GOV.UK
Invoicing note: VAT invoices must include your VAT registration number and show VAT separately. GOV.UK
Quote checklist (service projects & retainers)
Use this every time you price a job or update a retainer.
- Set a target gross margin (not a markup) aligned to your strategy (e.g., many service teams aim for 40–50%; your target may differ, lock it in).
- Build the true direct cost: fully-loaded labour (salary, employer NI/pension/holiday), subcontractors, and delivery software tied to the work.
- Use the table/calculator to convert your margin into the markup/price.
- Spell out VAT for B2B quotes (e.g., “ex VAT @20%”) and keep website price claims ASA-compliant (Advertising Standard Authority). ASA
- Scope guardrails: what’s included, what triggers a change order, and how overage is priced (at the same margin).
- Sanity-check: does the price cover overruns and still land at target margin?
Link your team to Gross margin for service businesses and Core formulas for definitions they can trust.
Price-rise script (email you can copy)
Subject: Updating your fee from [date]
Hi [Client],
Over the last [X] months we’ve absorbed increased delivery costs (primarily [labour/subcontractors/tools]). To keep standards where you expect them, from [date] your monthly fee will be £X (ex VAT @20%).If you’d like to hold your current budget, we can [option: reduce scope A] or [option: move B to quarterly], we’ll keep outcomes clear either way.
Thanks for your continued trust,
[Name]
Common questions (plain-English FAQ)
Is 30% margin the same as 30% markup?
No. 30% margin ≈ 42.9% markup. Margin is % of selling price; markup is % of cost.
Should service firms price in margin or markup?
Run the business on margin (profitability targets). Use markup only to build a price — and use the conversion table so the two don’t get mixed. Sage
Do I show prices inc or ex VAT?
For B2B, you may show ex-VAT prices if you clearly address them to businesses and prominently state the VAT rate/amount (e.g., “ex VAT @20%”). Otherwise include VAT. ASA
How do I strip VAT from a 20% VAT-inclusive price?
Using HMRC’s VAT-fraction 1/6 at the 20% rate, the ex-VAT figure is the gross ÷ 1.2 (inferred). GOV.UK
What happens next
If you want us to help set margin targets, train your team, and standardise quotes so you stop under-quoting, let’s talk.
Book a 20-minute planning call → we’ll map your margins, fix the pricing language, and leave you with a one-page playbook