Pricing for margin, not just revenue

What to take away

Margin is a percentage of the price; markup is a percentage of the cost. They are not interchangeable.
Include every direct cost, including your own labour, before judging a price.
Before discounting, calculate how much extra volume you need to earn the same gross profit.

Revenue tells you volume, margin tells you what is left

Revenue is the total you bill. Gross margin is the portion of revenue left after direct costs, expressed as a percentage: gross profit divided by revenue, times 100. Gross profit is revenue minus the cost of goods sold or cost of sales. A business can grow revenue every quarter and still struggle if each additional sale leaves too little to cover overhead.

This page is about setting prices. To see the percentage on your own numbers, use our profit margin tool, and to read the result in your reports, see how to read an income statement.

Margin and markup are not the same

BDC defines markup as a percentage added to the cost of goods sold to reach a price: gross profit per unit divided by cost per unit. Margin divides the same gross profit by the price instead. Because the divisors differ, the two numbers differ, and mixing them up is a common reason prices come out too low.

Illustrative example: a job costs $60 in direct costs and you charge $100. Gross profit is $40. The gross margin is 40% ($40 divided by $100). The markup is about 67% ($40 divided by $60). If you add 40% to the $60 cost thinking you have a 40% margin, you charge $84 and earn a margin of about 29%.

Count every direct cost

BDC describes direct costs as materials, duties and inbound shipping, plus the labour used to make a product or deliver a service. For a service business, the labour is the part most often left out. If you or your staff spend ten hours on a job, those hours belong in the cost, even if you do not pay yourself an hourly wage.

Keep your chart of accounts consistent so that direct costs are recorded separately from overhead such as rent, software and administration. When costs are mixed together, your reported margin moves for reasons that have nothing to do with pricing. Ask your bookkeeper which accounts feed cost of goods sold. A simple test is to list the last five jobs and ask whether the price covered the materials, the hours and a fair share of overhead.

Connect the price to your break-even point

Break-even is the level of sales that covers all your expenses with no profit. BDC gives the formula as indirect fixed costs divided by gross margin. With $25,000 of overhead and a 65% gross margin, break-even sales are about $38,461 (BDC’s example). The same overhead at a 40% margin needs $62,500 of sales.

That comparison is the heart of pricing for margin: a lower margin does not just reduce profit, it raises the sales you must make before profit begins. Try the numbers with our break-even tool, and compare them with the sales you can realistically win.

What a discount actually costs

Discounts feel small and cost more than they appear because the whole discount comes out of gross profit. Illustrative example: you sell at $100 with $60 of direct costs, so each sale earns $40. A 20% discount drops the price to $80 and the gross profit to $20, a margin of 25%.

To earn the same total gross profit you now need to sell twice as many units, and every extra sale also carries more direct cost and probably more cash tied up. Before offering a discount, calculate the volume you would need to break even on it, then ask whether you can deliver and be paid for that volume.

Choose a pricing approach on purpose

BDC describes five common approaches: cost-plus, competitive, price skimming, penetration and value-based pricing. Cost-plus adds a set margin to total cost, which is simple but ignores what customers will pay. Competitive pricing follows rivals, and BDC cautions that aggressive versions need healthy margins to absorb cuts. Penetration pricing starts low to win customers and only pays off if margins are high enough to support the lower price.

Value-based pricing sets the price from the value customers perceive rather than your production cost. BDC notes it suits distinctive offerings and that the value to the customer must exceed your costs. Many businesses use cost as a floor, then the market and the customer’s perceived value to set the price above it.

Check the market and review regularly

A margin target is only a starting point. Competitors’ prices limit what you can charge, and BDC warns that pricing above them can cost you sales. Your costs also change, so BDC suggests revisiting prices regularly, for example during annual budgeting, and explaining the reasons when you raise them, since customers think about the product rather than your costs.

Keep a short record of each price change, the date and the reason. It makes later margin comparisons meaningful and helps your accountant separate a price effect from a volume or cost effect.

What to bring to your accountant

Bring your income statement with direct costs separated from overhead, your price list or typical quotes, and your estimate of the time each type of job takes. Ask which costs belong in direct costs, what your actual margin is by product or service line, and what sales you need at break-even.

If prices include sales tax, remember the tax is not part of your revenue; keep it separate when you calculate margin. Pricing is a business decision, and an accountant can show you what your records say about the effect of each option.

Sources & editorial notes

Sources checked October 24, 2026. The examples are illustrative and provide general information. Discuss how the guidance applies to your circumstances with your accountant.

Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.