What is margin?

What does margin tell you?

How much of every pound a customer pays is left after costs. A 40% gross margin means that of each £1 of sales, 40p remains once the materials and direct labour for that sale are paid for. That 40p then has to cover rent, insurance, the van, your own time if it is not already in the cost, and eventually profit.

Gross margin is the one to watch job by job, because it tells you whether the pricing is right. Net margin is the one to watch for the business as a whole, because it tells you whether the pricing is right and the overheads are affordable. A business can have a healthy gross margin and still lose money if the overheads are too big for the volume of work.

Margins differ enormously between trades. Retail lives on thin margins and volume; consultancy has almost no cost of sales and a high gross margin. Comparing your margin with the trade norm is useful; comparing it with a different trade is not.

A worked example

A joiner quotes £2,000 to build and fit wardrobes. Timber, fittings and a day of a labourer's time come to £1,200. Gross profit on the job is £800, and gross margin is £800 divided by £2,000, so 40%.

The same job expressed as markup is £800 divided by the £1,200 cost, so 67%. Same job, same money, and a very different-sounding number, which is why quoting 'I add 40%' and 'I make 40%' are not the same claim.

If the joiner does eight such jobs a month and overheads are £2,400, net profit is £6,400 less £2,400, so £4,000 on £16,000 of sales: a net margin of 25%. Lose two jobs a month and the net margin falls to 20%; lose four and it is 10%. Overheads do not shrink to match.

Margin or markup?