Pricing is tough—especially in small and medium businesses
If you run a company, you’ve probably faced the challenge of deciding how to price your products. Should you add a percentage on top of your costs (markup)? Or should you think in terms of the profit you want relative to sales (margin)?
At first glance, these terms might sound like two ways of saying the same thing. But the choice between markup and margin can have a real impact on your bottom line. Many companies we’ve worked with underestimate just how much pricing decisions can make or break profitability.
Why pricing mistakes hurt more in small and medium companies
In smaller companies, every quote matters. You don’t have the luxury of high volumes or big corporate budgets to absorb missteps. One mispriced project can erase the profits of several successful ones.
What makes things harder is that pricing is often handled differently by different people. A sales rep might use one formula, an engineer another. Over time, this creates inconsistent pricing that confuses customers, squeezes margins, and slows down growth.
That’s why understanding the difference between markup and margin is so important—it gives you a common language and a clearer way to control your results.
What’s the difference between markup and margin?
Markup
- Adds a percentage on top of your cost.
- Example: If your product costs $100 to make, and you add a 30% markup, the selling price is $130.
- Pros: Simple, quick, and intuitive if you’re starting from costs.
- Cons: Doesn’t directly reflect profitability as a share of sales. If costs change and you don’t adjust, your profitability can drop without you noticing.
Margin
- Looks at profit as a percentage of the selling price.
- Example: If you sell for $130 and the cost is $100, your profit is $30. That’s about a 23% margin ($30 profit / $130 selling price).
- Pros: Tied to financial reporting, better for comparing products with different costs, and provides stronger visibility on profitability.
- Cons: Less intuitive when calculating from costs, sometimes harder for new staff to grasp.
Why markup can be misleading
A common mistake we’ve seen is when a company sets a fixed markup rate across all products. It feels efficient, but it often leads to surprises.
Here’s a quick example:
- You decide to add a 10% markup on a $100 cost. Your selling price becomes $110.
- But the actual margin is not 10%. It’s 9% ($10 profit / $110 price).
That small difference might seem harmless. But scale that across thousands of units or high-value jobs, and suddenly your profits don’t look the way you expected.
Another issue comes up when costs fluctuate. If steel prices jump by 15% and you stick to your fixed markup, your margin shrinks. Without realizing it, you’re working harder for less return.
Why margin gives more control
From our experience, margin is the more reliable approach—especially in manufacturing environments with low volume and high mix. When every project or order is different, margin helps you see exactly how much you’re earning in relation to sales.
This visibility makes it easier to:
- Compare profitability across different products or customers.
- Adjust prices strategically in competitive markets.
- Plan for sustainable growth instead of chasing short-term wins.
In other words, margin aligns better with long-term decision-making. It’s the way your financial statements measure success, so using the same language in your pricing keeps everyone on the same page.
The hidden challenge: consistency in pricing
Even once you’ve decided whether to use markup or margin, the challenge is keeping your pricing consistent.
In many small and medium companies, every new hire brings a slightly different way of quoting. Some rely on spreadsheets, others on memory. Over time, pricing drifts. Customers notice inconsistencies, and internally it creates endless debates about what the “right” price should be.
That’s why having a reliable system matters. A tool that helps you build, store, and apply your pricing formulas consistently can save hours of back-and-forth, reduce mistakes, and protect your profitability.
Tangible benefits of getting pricing right
When manufacturers switch from ad-hoc pricing to a structured approach with clear margin goals, they often see immediate improvements:
- Higher profitability: Even a small correction in how you calculate margin can add several percentage points back to your bottom line.
- Better decision-making: Teams can quickly see which products or projects are really profitable, and which ones need review.
- Fewer disputes: With one shared system, sales, engineering, and management speak the same pricing language.
- Scalable quoting: As you grow, new team members can hit the ground running without reinventing the process.
How to start making pricing work for you
If you’re considering a change, here’s a simple action plan:
- Audit your current pricing method. Are you using markup, margin, or a mix of both? Are your formulas consistent across the company?
- Run the math. Take a few recent quotes and calculate the actual margins. Do they align with what you expected?
- Choose a standard. Decide whether markup or margin makes more sense for your business model. For most manufacturers, margin offers stronger visibility.
- Document your formulas. Don’t rely on memory or individual spreadsheets. Make sure your team can apply the same method every time.
- Implement a system. Whether through an ERP or another tool, put your formulas into a platform that everyone can use consistently.
Ready to take control of your pricing?
At Nengatu, we make it easier for manufacturers to calculate both markup and margin directly in the system. That way, you can quote quickly, stay consistent, and keep your focus on running the business instead of wrestling with spreadsheets.
ERPs don’t need to be complex. We offer a free trial so you can see for yourself.
Book a call with us today. We’ll help you review your current pricing process and build a plan for upgrading your ERP—without the usual headaches.