Pricing mistakes don't always look like mistakes.
A contractor can have a full schedule, strong sales, and plenty of work coming in while still leaving money on the table. One reason is a basic pricing mix-up that happens more often than it should: treating markup and margin as if they mean the same thing.
They don't.
The difference can look small on paper, but it can have a real effect on what your HVAC or service business actually keeps after the job is finished. The planning for profit approach focuses on understanding that difference and using the right numbers when setting prices.
Markup and Margin Are Not the Same
The simplest way to remember it is this:
Markup is based on your cost. Margin is based on your selling price.
Say a job costs your company $1,000.
If you add a 40% markup, your selling price is $1,400. Your gross profit is $400.
But $400 is only about 28.6% of the $1,400 selling price. Your markup is 40%, but your actual gross margin is 28.6%.
That distinction matters when you're setting prices around a target margin.
A contractor who thinks a 40% markup gives them a 40% margin is pricing two very different ways without realizing it.
Why the Difference Matters More as You Grow
One job might not make the difference obvious.
Now multiply the same mistake across hundreds of service calls, replacement jobs, or installation projects.
Your company still has to pay technicians, payroll taxes, insurance, vehicles, office staff, software, rent, training, advertising, and other overhead. Those expenses don't disappear because a job was marked up by a certain percentage.
This is where many contractors get frustrated. Revenue looks good, but the money left after expenses doesn't match expectations.
The issue isn't necessarily that the company needs more sales. The pricing model itself may need another look.
A Simple Example
Let's say your direct cost for a group of jobs is $300,000 and you want a 40% gross margin.
To achieve a 40% margin, you can't simply add 40% to the cost.
You need to calculate the selling price based on the margin you want.
The calculation is:
Selling Price = Cost ÷ (1 − Target Margin)
So:
$300,000 ÷ 0.60 = $500,000
That gives you $200,000 in gross profit, which is exactly 40% of the selling price.
Now compare that with adding a 40% markup:
$300,000 × 1.40 = $420,000
The gross profit is $120,000, but the margin is only about 28.6%.
Same cost. Same 40% number used in the pricing conversation. Very different result.
The Bigger Problem Is Usually Overhead
Margin isn't the same thing as net profit.
Your gross margin has to contribute enough money to cover the costs of running the company.
For an HVAC contractor, that can include:
- Technician wages and employment costs
- Trucks, fuel, and maintenance
- Insurance
- Office and administrative payroll
- Dispatch and customer service staff
- Software and technology
- Warehouse and facility costs
- Marketing
- Training and employee development
Once those costs are accounted for, whatever remains is what the business can actually keep as net profit.
That's why using a generic markup percentage isn't enough. Your company has its own cost structure.
How to Price From a Target Margin
Start with the margin you actually need.
For example, if your target gross margin is 30% and your job cost is $2,000:
$2,000 ÷ (1 − 0.30) = $2,857
At that selling price, the gross profit is approximately $857, which represents 30% of the selling price.
If you simply applied a 30% markup instead, you'd charge $2,600.
That leaves you with $600 in gross profit, which is only about a 23.1% margin.
That's a difference of more than $250 on one $2,000-cost job.
Do that repeatedly and the gap becomes difficult to ignore.
Don't Build Prices Around What Competitors Charge
Another common pricing mistake is looking at what another contractor charges and using that number as your starting point.
The problem is that you don't know their numbers.
Their labor costs may be different. Their overhead may be lower. Their productivity may be higher. They may also be underpricing their work.
Your pricing needs to work for your business.
That means knowing your actual costs, understanding the gross margin you need, and making sure your prices give the company enough room to cover overhead and produce the expected profit.
Where Profit Planning Fits In
This is where financial planning becomes useful.
Instead of checking whether a job was profitable after the fact, contractors can build pricing decisions around their actual financial requirements.
Planning for Profit is designed around this type of financial visibility, helping contractors work through pricing, costs, overhead, and profitability rather than relying only on a standard markup percentage.
The goal isn't to charge more simply because you can.
It's to know what your work needs to sell for if you want the business to remain healthy.
Make Sure Your Team Understands the Difference
There is another part of this that owners sometimes overlook.
If the owner understands margin but the estimator, salesperson, or service manager is working from markup, pricing can become inconsistent very quickly.
Everyone involved in quoting work should understand:
- What the company's target margin is
- Which costs need to be included
- How the selling price is calculated
- When discounts can be offered
- How a price change affects gross profit
This is especially important when multiple people are creating estimates.
A pricing system only works when the people using it understand the numbers behind it.
The Bottom Line
Markup isn't inherently bad. The problem is confusing markup with margin when you're trying to determine whether your pricing is actually producing the profit your company needs.
A 40% markup does not give you a 40% margin. A 30% markup does not give you a 30% margin. Once you understand that difference, pricing decisions become much easier to evaluate.
For contractors, the real question isn't simply, "What percentage should we add?"
It's "What margin does our business need, and does our pricing actually produce it?"
That is the number worth watching.
Sign in to leave a comment.