Know the difference between markup and margin
Markup is profit as a percentage of cost. Margin is profit as a percentage of price. A product bought for 60 and sold for 100 has a margin of 40 percent but a markup of about 67 percent. Mixing them up leads to prices that are lower than intended, so decide which one you use and apply it consistently.
For planning, margin is the more useful measure because it can be compared directly with the share of each sales dollar available to cover overhead.
Find the true direct cost
Direct costs are the costs that exist because you made the sale: materials, subcontractors, merchant fees, shipping, and labor tied to the job. Labor is where owners most often undercount. Include payroll taxes and benefits, not just wages, and include the owner's own time if the owner does billable work.
Pull the figures from your books. If expenses are lumped into one category, you cannot see direct cost by offering. Setting up separate income and cost accounts, or using classes or tracking categories in QuickBooks Online or Xero, makes the analysis possible.
Calculate margin by line and by customer
Build a simple table with revenue, direct cost and margin for each product, service or major customer. Sort by margin. You will often find a small set of offerings producing most of the profit, and a tail of items at thin or negative margins. Consider also the time cost: a job with decent margin that takes three times the effort may rank lower than it appears.
Check for customers who generate heavy support, frequent revisions or slow payment. Their margin after that extra effort is lower than the invoice suggests.
Test a price change before making it
Estimate the effect of a modest increase. If your margin on an item is thin, a small price rise can raise profit a lot, and you can lose a few customers before you are worse off. Run the arithmetic for your own numbers rather than relying on a general rule. Consider options other than a flat increase: tiered packages, minimum order sizes, delivery charges or raising prices only for new customers.
Communicate changes clearly and give notice where contracts or customer relationships call for it. Ask your attorney if a contract limits how and when prices can change.
Keep the analysis current
Costs drift. Supplier prices rise, wages change and fees get adjusted, so margins you calculated last year may be wrong. Revisit the table at least twice a year and after any large cost change. This only works if transactions are categorized correctly and posted promptly, so the analysis reflects what really happened. MCC Solutions can prepare a margin report from your monthly books as part of its planning support.
Common questions
What is a good margin for my business?
It depends on your industry and cost structure. Compare against your own history and your overhead, and ask your trade association or CPA for benchmarks.
Should I include my own time in costs?
Yes, if you do billable work. Otherwise margins look better than they are and you may underprice.
How often should I review prices?
At least once or twice a year, and whenever a major cost changes.
This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation.