Glossary · pricing
Markup vs margin
Markup is the percentage a shop adds to what a part cost, and margin is the percentage of the selling price left as gross profit, so a $100 part sold at $150 carries a 50% markup and a 33.3% margin.
Also called
- At the counter
- markup, margin, parts markup, markup and margin, markup vs margin, convert markup to margin
Both words describe the same $50 of gross profit on a part that cost $100 and sold for $150. The percentages differ because they are measured against different denominators: 50% against the cost, 33.3% against the sale. Everything that goes wrong here goes wrong at that one point.
How do you calculate markup?
Divide the gross profit by the cost. A part bought at $80 and sold at $120 made $40, and $40 divided by $80 is 50%. Multiply cost by one plus the markup to go the other way, so that same $80 part at a 60% markup sells for $128.
This is the figure that gets typed into a parts matrix as a rule, because the shop knows the cost at the moment of the sale and the matrix has to turn that cost into a price without anybody doing arithmetic at the counter.
How do you calculate margin?
Divide the gross profit by the selling price. The same $80 part sold at $120 made $40, and $40 divided by $120 is 33.3%. Going the other way takes a division. To hit a 40% margin on an $80 part, divide $80 by 0.60 and sell it at $133.33.
This is what comes out at the end of the month. Your profit and loss statement reports it, and the arithmetic is the same one the IRS sets out for a small business in Publication 334: "First, divide gross profit by net receipts. The resulting percentage measures the average spread between the merchandise cost of goods sold and the selling price." Any conversation with a lender or a buyer happens in these terms. Gross profit is the dollar version of the same fact.
What markup do I need to hit a target margin?
Divide the target margin by one minus the target margin. That single formula settles most of the arguments in a shop.
| Target margin | Required markup | $100 part sells at |
|---|---|---|
| 30% | 42.9% | $142.86 |
| 35% | 53.8% | $153.85 |
| 40% | 66.7% | $166.67 |
| 45% | 81.8% | $181.82 |
| 50% | 100% | $200.00 |
| 55% | 122.2% | $222.22 |
| 60% | 150% | $250.00 |
Notice how fast the required markup climbs past the halfway point. Every extra point of margin above 50% costs more markup than the one before it, which is why shops chasing a 60-point parts department end up shopping cost harder than they shop price.
What does confusing the two cost?
Take a month with $40,000 of parts cost through the door. An owner who wants 40 points and enters 40% into the matrix sells that inventory for $56,000 and books $16,000 of gross profit, which is a 28.6% margin. The same owner who converts first enters 66.7%, sells it for $66,667 and books $26,667.
That gap is $10,667 in one month on the same parts, the same suppliers and the same technicians. Nothing about the shop changed. One number in a settings screen was interpreted two different ways, and the report at the end of the month showed a parts department underperforming for reasons nobody could find.
What does a discount do to margin?
More than the number on the coupon. Take a part costing $60 that sells at $100, which is a 40% margin and $40 of gross profit. Knock 10% off the price and it sells at $90, the gross profit falls to $30, and the margin lands at 33.3%. A tenth off the price took a quarter off the profit.
The volume side is worse. Making the same $40 of gross profit at $30 a unit takes 33% more units through the door, on a shop with the same number of bays and the same technicians. Fleet pricing, coupon promotions and the friendly discount an advisor gives at the counter all run this arithmetic whether anybody does it out loud or not.
Why does the parts and labor split matter outside the office?
Because the invoice carries the same split. California requires that "Service work and parts shall be listed separately on the invoice", each with its own subtotal before sales tax. The tax side draws the same boundary for its own reasons. The state's guide for repair shops says that "Generally, your charges for labor and services are not taxable" while the parts are, so "You must list labor and service charges separately on your customer invoices." The boundary an owner manages by is the boundary a customer reads and the boundary a tax auditor checks.
Think about that before covering a thin parts department with the labor line. Move $30 of gross profit from a part onto the hours and the invoice shows a rate out of step with every other quote the customer collected, while the parts margin report keeps saying the department is underperforming. The fix belongs where the leak is, which is the cost side and the parts matrix rather than the hourly rate.
Why does the same job show two different percentages?
Because the two are computed against different denominators, and shop software shows whichever one its designer picked. A jobber price buy sold at list can appear as a 67% markup on one screen and a 40% margin on the next screen, describing one transaction.
Ask the question out loud before comparing anything. When a supplier rep says a program will get you to 45, and your shop management system reports 45, confirm both mean the same denominator. Parts margin is the number worth tracking, and it only means something if everybody quoting it agrees on the arithmetic.
Back to the glossary, or read how an estimate gets priced.
Questions shops ask
- Is a 50% markup the same as a 50% margin?
- No. A 50% markup on a $100 part sells it for $150 and leaves $50 of gross profit on a $150 sale, which is a 33.3% margin. Getting to a 50% margin on that same part means selling it for $200, which is a 100% markup. The two numbers only agree at zero.
- Which number should a shop manage to?
- Margin, because margin is what the profit and loss statement speaks. Gross profit divided by sales is the line an owner reads every month, and it is the number a lender or a buyer will ask for. Markup is the setting you type into a parts matrix to produce the margin you want.
- How do I convert a target margin into a markup?
- Divide the margin by one minus the margin. A 40% margin target becomes 0.40 divided by 0.60, which is a 66.7% markup. A 45% target needs 81.8%. Run the conversion once, write the results on a card and tape it to the parts computer.
- Does the same math apply to labor?
- The arithmetic is identical, but shops rarely talk about labor in markup terms. Labor gross profit is the labor sale minus what the technician was paid for those hours, expressed as a percentage of the sale. That is a margin, and comparing it against parts margin is how an owner finds out which department is carrying the shop.
- Where does freight fit?
- In cost, before the markup runs. A part that lands with a delivery charge or a hot-shot fee cost more than the invoice line says, and a matrix applied to the wrong cost quietly returns a lower margin than the report claims. Shops that ignore freight are the ones whose parts margin never matches the budget.