Glossary
Markup
Markup is the percentage added to the cost of a product, service, or subcontracted work to arrive at the price charged to the client. It is always calculated on cost, not on the final price, which is what makes it easy to confuse with margin.
How to calculate markup
Subtract cost from price to get the profit, divide that by the cost, then express it as a percentage.
Because markup is calculated against cost, the same dollar profit produces a different-looking percentage than margin does on that same sale.
Markup % = (Price - Cost) / Cost × 100
Example: a subcontractor invoice of $4,000 marked up 20% is billed to the client at $4,800, an $800 markup.
Markup vs margin
Markup is profit as a percentage of cost. Margin is profit as a percentage of the selling price. The two look close at small percentages and pull apart fast as they climb, which is why they get mixed up.
A 50% markup on a $100 cost prices the work at $150, a $50 profit. That same $50 on a $150 price is only a 33% margin. An agency that prices by markup but reports profitability by margin needs to keep the conversion straight, or the budget looks healthier than the margin actually is.
Where agencies apply markup
Markup shows up most on pass-through costs an agency does not produce itself: subcontractors, freelancers, media spend, printing, or software bought on a client's behalf. The agency marks up the cost to cover the time spent managing and being accountable for it, not just to add profit for its own sake.
Typical markups on pass-through costs run 10% to 20%. Some client contracts, particularly for media buying, ban markup outright and require cost transparency instead.
Example
An agency pays a freelance illustrator $2,500 for a set of assets and marks the cost up 15% before billing the client. The markup is $375, so the client is billed $2,875. That $375 is margin on a cost the agency did not have to deliver itself, on top of whatever it separately bills for its own team's hours managing the project.
