Many tradies get caught out on this early, particularly when pricing jobs quickly or copying what the bloke down the road is doing. For example, you might hear that a local electrician is charging a 35% ‘markup’ on certain jobs or materials and decide to copy that model. The issue is a simple but costly one: markup and margin are not the same thing, yet they’re often used interchangeably. Perhaps he said markup but meant margin, or perhaps he doesn’t know himself. Getting this wrong can mean you think you’re pricing profitably when in reality margins are far thinner than expected.

Markup is what you add to your costs to arrive at a selling price. Margin is the portion of the final sale price that is profit.

For example, assume a job has total costs of $1,000.

• A 35% markup means you add $350, giving a selling price of $1,350. Your profit is $350, which is only a 26% margin ($350 ÷ $1,350).

• A 35% margin, however, means profit must be 35% of the selling price. To achieve this, the same $1,000 job needs to be priced at approximately $1,540, generating $540 of profit. This is equivalent to a 54% markup, not 35%.

• The quick way to calculate this is to divide the total costs by (1-target margin). So $1,000 ÷ (100%-35%) = $1,000 ÷ 65% = $1,540. See our Educational Resources page to dig deeper.

That gap is huge. If you price using markup when you’re targeting margin, you systematically undercharge. This is one of the most common reasons trade businesses stay busy but struggle to build real profitability. Understanding the difference is foundational, and it feeds directly into better pricing, better back costing, and better decisions as the business grows.

The market you’re operating in will obviously influence the prices you can charge, but it doesn’t always define them. The first lesson here is to understand the difference between markup and margin. We always recommend working to a target margin rather than a target markup, as this forces you to think and price in terms that actually support growth.

The second is to recognise that sometimes you need to ignore what the electrician down the road is charging and measure and improve your pricing independently. Because that bloke may also be copying his old boss – or the next guy down the street – and the math may be just as wrong. Perhaps a margin of 40% (or higher) is achievable on that particular job.

One of the biggest misconceptions we see in growing trade businesses is that meaningful profit improvements require massive changes – more staff, more jobs, more hours, or higher risk. In reality, some of the biggest gains come from relatively small improvements in gross margin, particularly once revenue reaches scale.

Consider a trade business turning over $2 million per year with an average gross margin of 30%. That equates to $600,000 of gross profit before overheads. Now assume that, through a combination of better pricing discipline, improved job visibility using Job Management Software (JMS), increased charge-out rates, and simply walking away from consistently unprofitable work, the business lifts its average gross margin to 35%. Revenue stays the same, but gross profit increases to $700,000.

That’s an extra $100,000 per year generated without working longer hours, winning more jobs, or taking on more risk.

These margin gains rarely come from one big change. More often they come from pulling several small levers at once: adjusting pricing on jobs that are consistently underperforming, charging for site visits and quotes, improving labour productivity, moving certain work to fixed-price service fees, or deciding not to chase low-margin work that looks busy but adds little value. JMS plays a key role here by giving you accurate job-level data so decisions are made on facts, not feel.

To put this into context at the bottom line, assume that same $2 million business is currently generating a 15% net margin after overheads. That means net profit of $300,000 per year.

If gross margin improves from 30% to 35%, gross profit increases by $100,000, from $600,000 to $700,000. In most cases, overheads (rent, vehicles, admin staff, software, insurances, etc.) do not increase materially just because margins improve. They are largely fixed or semi-fixed.

As a result, most (or all) of that additional $100,000 flows straight through to the bottom line. Net profit increases from $300,000 to $400,000, lifting the net margin from 15% to 20%.*

That’s a 33% increase in net profit, achieved without growing revenue, hiring more staff, or working longer hours. This is why we place so much emphasis on measuring margins early and improving them deliberately. Small percentage changes, applied consistently, can have an outsized impact on what you ultimately take home.

*On a larger revenue base, the numbers compound quickly. At $10 million in annual turnover, a 1% gross margin improvement delivers an extra $100,000 to the bottom line.

One of the most common (and costly) mistakes we see in trade businesses is underestimating the true cost of labour. Most owners look only at the hourly pay rate and build pricing around that figure. The problem is that the hourly rate is only a fraction of what an employee actually costs the business.

To illustrate this, consider a trade business employing three full-time staff.

Step 1: The Headline Hourly Rates

Assume the following base pay rates:

• Dylan: $32 per hour

• Lee: $44 per hour

• James: $56 per hour

Step 2: Add the Labour Burden

Once you factor in on-costs, the picture changes. For each employee, the business also pays for:

• Superannuation (12%)

• Workers compensation insurance (assume 4.5%)

• Payroll tax (where applicable)

• Other direct labour costs (allowances, etc.)

These on-costs need to be added to the base hourly wage.

Step 3: Account for Non-Billable Time

Each employee may be paid for roughly 2,080 hours per year, but not all of those hours are chargeable. After allowing for annual leave, public holidays, sick leave, and an assumed 0.5 hours per day of non-billable time, billable hours fall to around 1,635 hours per employee per year.

This matters because all costs must be recovered over fewer productive hours, pushing the true cost per billable hour higher again:

• Dylan total labour cost per billable hour: $47.43

• Lee total labour cost per billable hour: $63.30

• James total labour cost per billable hour: $83.00

It’s worth noting this assumption is relatively conservative. If non-billable time is higher, say 1 hour per day (which is common after accounting for multiple trips to suppliers, waiting around the workshop, travel inefficiencies, admin time, job setup, training, and general downtime) billable hours reduce further, and the cost that needs to be recovered per hour increases again.

That’s before a single dollar of overhead is added.

Step 4: Allocate Overheads

Now layer in overheads – vehicles, fuel, tools, rent, software, admin staff, insurance, and general running costs.

In this example:

• Total annual overheads: $135,000

• Total billable hours across the team: 4,905

• Overhead per billable hour: $27.52

Step 5: The True Cost Per Hour

Once labour burden and overheads are included, the real cost to the business per billable hour is approximately:

• Dylan: $74.95 per billable hour

• Lee: $90.83 per billable hour

• James: $110.52 per billable hour

After arriving at these figures, you’ll want to compare against your charge out rates.

Why This Matters

If you’re pricing labour at or near the base hourly rate (or even modestly above it) you are almost certainly undercharging. The business might stay busy, but margins will be thin, cash flow will be tight, and growth will feel harder than it should.

This is exactly why understanding the real cost of labour is foundational. Until this is measured properly, pricing decisions are guesses (and usually optimistic ones).

Only once this is clear does it make sense to move on to improving utilisation, charge-out rates, and margins.