Learn how margin and markup work and how you can think about them on your Roofr proposals, and how to measure of profitability in terms of gross profit.

Gross Profit Definition

Gross Profit vs. Net Profit

Margin vs. Markup

When to use Margin

When to use Markup

Equivalent markups and margins

Useful resources

Gross profit is the amount of money you make on a job after you account for Cost of Goods Sold (COGS). COGS are the costs that are directly tied to generating the revenue of that specific job – generally, materials and labor. COGS are the costs of actually doing the job itself. You can’t replace a roof without buying materials from your supplier and paying your crew to install them.

How much you got paid - how much you had to spend on the job = your gross profit

Net Profit includes operating expenses; all of the other costs associated with running the business that aren’t directly tied to generating revenue. This include salaries, rent, sales and marketing costs, equipment. Taking your gross profit and then subtracting operating expenses (plus interest and taxes) gives you your net profit (also called net income), which is what will tell you if a company is actually **profitable.

Markup and Margin are two ways of expressing the relationship between revenue, COGS, and gross profit.

Margin = (Revenue - COGS) / Revenue

Markup = (Revenue - COGS) / COGS

Revenue minus COGS is equal to gross profit, so both formulas can also be expressed as:

Margin = Gross Profit / Revenue

Markup = Gross Profit / COGS

Margin is an expression of gross profit as a percentage of revenue (the sales price) while markup is an expression of gross profit as a percentage of COGS.

So imagine you just sold a job for $10k, and COGS were $7k, which makes gross profit $3k.

Margin is $3k / $10k = 30%.

Markup is $3k / $7k = 42.86%.

Margin is the best way to express how profitable a job was after-the-fact, once the price is already known.

Markup is the best way to quickly get from COGS to a price, when the price isn’t already known.

For example, you sell a job for $22k. Margin tells you what percentage of that is gross profit, which is a really intuitive way to describe how profitable the job was. “I keep half of that” or “I keep 35% of that”. In this context, markup is actually NOT that useful, because markup is relative to COGS. So it would be weird to say “I sold this job for $22k and my gross profit was 50% of my COGS”. You can’t directly apply the 50% to the $22k, so it’s unknown.

TLDR: when you’re starting with price, use margin.

You have a job where COGS is $13k and you’re trying to figure out how much to charge. In this case, margin is not useful, because margin tells you gross profit as a percentage of revenue (price) and you don’t know price yet.

(You can do the math to figure out how much you should charge in order to achieve a given margin — that’s actually what our margin slider does)

But generally, this is where markup comes in handy. If you know your COGS, and know roughly how much you need to mark up COGS to ensure a profitable job (ie: 45%), you can easily do the math.

For example; 45% of $13k is $5.85k = my gross profit, and my price is $18.85k. Now that I’ve got the price, I can check it by figuring out the margin and making sure it’s going to be profitable enough: $5.85k / $18.85k = 31%.

When expressed as a percentage, a given margin will always be equivalent to the same markup, and vice versa. For example, 33.33% margin always works out to a 50% markup, and applying a 50% markup always results in a 33.33% margin. Here are a few other notable margin and markup equivalents:

💡 As margin increases, the difference between margin and its equivalent markup gets bigger and bigger. Margin expresses gross profit as a percentage of revenue, and markup expresses gross profit as a percentage of COGS, and revenue will be greater than COGS. So, as percent margin increases, percent markup has to increase even more to keep up, since it’s being multiplied against a smaller number.

Markup and margin calculator (use advanced mode to control both margin and markup)

Investopedia: gross profit vs net income