If you’ve ever caught yourself saying something like, “We use a 30% markup because it works,” you’re not alone. Many small and medium-sized manufacturers start there. It’s simple, familiar, and it seems to get the job done. The problem is, those numbers often come from habit, not from data.
And while the books might still look good at the end of the month, one small market shift, higher rent, slower sales, or a sudden increase in material prices, can turn that “good enough” markup into a silent profit drain.
Your margin and markup should tell the story of your company’s costs, risks, and goals. Not the story of your competitors.
The Hidden Problem: Numbers Without a Foundation
Let’s face it, building quotes, managing costs, and trying to stay competitive can be overwhelming. Many business owners in manufacturing juggle dozens of decisions every day. When things get busy, pricing often becomes a shortcut: “Just use 25% markup, same as before.”
But here’s where the problem starts:
- That 25% might not reflect your real costs anymore.
- Growth changes everything. More staff, more machines, more office overhead.
- Market conditions shift faster than most pricing strategies do.
And when those factors aren’t reflected in your margin or markup, your profits start to erode quietly. Even worse, small errors in cost estimation compound over time. That’s how companies end up working harder, producing more, but earning less.
When Margins Compound (and Confuse)
We’ve seen cases where companies accidentally, or intentionally, apply markup or margin on top of an already marked-up cost.
Here’s a simple example:
- A cutting process has one operator at $20/hour.
- Machine depreciation is $10/hour.
- Total cost: $30/hour.
To stay safe, someone adds a “buffer” of $10/hour. So now the internal rate is $40/hour. But management is not satisfied, and adds a 25% markup on top, resulting in $50/hour. When quoting a job, your hourly rate shows $50, but you don’t know why and add more markup at the end.
Markup shouldn’t be applied twice. The “buffer” already inflated your base cost, and now it’s being marked up again. When this job runs for 10 hours, your cost should’ve been $400, but now it shows $500. Multiply that across all your quotes, and your numbers start losing meaning.
This is what we call compound margin. It distorts your real profitability and makes it difficult to know where your true costs sit.
The Trap of Only Watching Direct Costs
Direct costs, like labour and machine hours, are easy to track and feel tangible. But they’re only part of the picture.
Your office team, rent, accounting software, salespeople, and even your Wi-Fi bills are all part of your company’s cost structure. These are indirect costs, and they eat into your profit just as much as material waste or machine downtime.
When a company grows, overhead often grows faster than production. New hires, bigger spaces, better systems, all good things, but they must be reflected in your margins. If your markup stays the same while your overhead doubles, your net profit can vanish without you realizing it.
The Solution: Build Your Margin on Real Numbers
The good news is that getting your numbers right isn’t complicated once you know where to look. It starts with understanding your real cost composition, not just what you see on the shop floor.
Here’s a simple framework you can start with:
1. List your indirect costs
These include overhead and fixed costs such as:
- Office staff salaries
- Rent, utilities, insurance
- Computers, software, and other non-production tools
- Financial debt (loans, interest, etc.)
2. List your direct costs
These are tied directly to production:
- Labor and machine rates
- Materials and consumables
- Subcontracted services
3. Compare both totals
Let’s say your monthly direct costs are $10,000 and your indirect costs are $5,000.
Your indirect-to-direct ratio is 50%.
That means your minimum required margin is 33% (because $5,000 overhead on $15,000 total costs means 33% of your selling price needs to cover overhead). In markup terms, that’s 50%.
4. Add your risk factor
Look at past months to understand how much fluctuation you experience in materials, rework, or downtime. Add a small “risk buffer,” ideally around 3–5%.
5. Add your desired profit
Once your costs and risks are covered, it’s time for actual profit. Aim for something realistic and sustainable. 10–15% is a good starting point.
In the example above, 33% (costs) + 5% (risk) + 12% (profit) = 50% total margin. That’s not just a random number anymore, it’s your company’s financial fingerprint.
Tangible Benefits of Knowing Your True Margin
When you base your pricing on data instead of gut feeling, everything becomes easier to manage. You can:
- Adjust prices confidently when costs change.
- Identify inefficiencies faster, whether it’s an underperforming process or an overpriced service.
- Forecast growth knowing exactly how each new hire or piece of equipment affects profitability.
- Build trust with customers by backing your prices with logic, not guesswork.
And when you connect your ERP data with accounting insights, you can see trends clearly and react before small issues become financial problems.
A Final Thought: Numbers That Protect Your Future
Margins and markups are more than just percentages, they’re the reflection of your company’s health, structure, and resilience. Basing them on data, not assumptions, means you’re building a business that can adapt and grow without losing sight of profitability.
If you’re still using “the same markup we’ve always used,” now’s the time to revisit it. Your costs, your team, and your market have changed, then your pricing should, too.
Ready to Build Stronger Margins?
If you want to stop guessing and start managing your pricing with confidence, try tracking your costs through Nengatu’s ERP system.
Our platform was designed with small and medium manufacturers in mind, simple enough to use every day, yet powerful enough to give you real insights into your operations and profitability.
Because your margin isn’t just a number. It’s your business story, told in percentages.