If you price by adding a percentage on top of your cost, you are using markup. If you are quoting a percentage of the selling price you intend to keep, you are using margin. They sound interchangeable. They are not, and the gap between them grows the more profit you are trying to add.
The mechanism, in one example
Your fully loaded cost on a job is $100 and you want to keep 20%.
Markup math — $100 × 1.20. You think you kept 20%. You kept $20 on $120, which is a 16.7% margin.
Margin math — cost ÷ (1 − margin) = $100 ÷ 0.80. This is the price that actually leaves 20% behind.
Five dollars on a hundred-dollar job, at a 20% target. The gap widens as the target climbs, because the correct formula divides by a smaller number rather than multiplying by a bigger one. Run markup math instead of margin math across enough jobs and the shop is structurally underpriced without a single job looking wrong on its own.
The size of it at shop level
Contractors who price from flat-rate books — which are built on margin math — report 7% net profit, against 4% for shops using an alternative pricing method S-ACCA-01. Average net profit across the trade is 6% S-ACCA-03. The distance between those two pricing methods is roughly the distance between an average shop and a struggling one.
Neither figure proves that the formula alone causes the difference — shops that price from a book tend to run other things differently too. What the arithmetic above does prove is the direction: one method takes less than you think it takes, every time.
How to tell which one you are doing
One question settles it: when you set a price, do you start from your cost and add a percentage, or start from a target margin and solve backward for price?
If it is the first, run both numbers on your last ten invoices. The gap you find is money already left on the table — not a future risk, a past one.
The calculator shows both readings side by side for your own rate, so the comparison takes a minute instead of an evening.