Markup vs Margin and Pricing Floors

1) The real problem: one percentage, two different meanings

Assume a delivered service unit costs 60 monetary units before payment, support, and other variable costs. Sales says, “Use a 50% markup, so we have a 50% margin.” That is wrong because the denominators differ. This lesson does not try to discover the market-optimal price; it builds Pricing Floor Decision Sheet v1 so a proposed price can be accepted, repriced, excepted, held, or disputed from visible evidence.

2) Boundary and deliverable

The deliverable is an auditable Pricing Floor Decision Sheet v1. It keeps unit cost, price, discount, payment cost, support cost, and other variable cost in one evidence model, then derives markup, margin, minimum price, and a typed decision state. Cost-ledger ownership remains in ARC-016 and local-compute economics remains in ARC-018.

3) Fact: markup and margin use different denominators

Current QuickBooks guidance defines markup as Profit / Cost and margin as Profit / Revenue. If cost is 50 and selling price is 75, profit is 25; markup is 50%, but margin is only 33.33%. That denominator difference can change a pricing decision directly.

4) Fact: unit economics connects cost to value

FinOps Unit Economics connects technology cost to business-value units and discusses marginal cost and marginal revenue in break-even, contribution-margin, and pricing tradeoffs. FinOps does not prescribe this project’s minimum margin or exception policy; those remain local design decisions.

5) Lock the governed cost scope before percentages

In this lesson, governed_cost = unit_cost + payment_cost + support_cost + variable_cost. If support is attributable to this customer, excluding it merely to improve the displayed percentage creates a scope mismatch. The correct state is DISPUTED, not ACCEPT.

6) Apply discount to the price the customer actually pays

selling_price is the pre-discount candidate price and effective_price = selling_price × (1 - discount_pct/100). The floor must be tested against effective price. If a discount is introduced after approval, the previous approval is no longer an oracle and the floor must be recomputed.

7) Build profit, markup, and margin from one evidence scope

First compute profit_amount = effective_price - governed_cost. Then compute markup_pct = profit_amount / governed_cost × 100 and margin_pct = profit_amount / effective_price × 100. Both use the same profit amount, but different denominators. Changing the cost scope between the two makes the comparison invalid.

8) Derive the floor from a target margin

This contract uses floor_basis = TARGET_MARGIN_ON_EFFECTIVE_PRICE. For minimum margin m, minimum_price = governed_cost / (1 - m). With governed cost 75 and a 30% minimum margin, the floor is about 107.14. The threshold is a MAKNOW design control, not a universal market law.

9) Baseline counterexample: 50% markup is not 50% margin

With governed cost 75 and effective price 112.50, profit is 37.50. Markup is exactly 50%, while margin is only 33.33%. If the target margin is 35%, the minimum price is 115.38, so the correct state is REPRICE even though the markup headline looks strong.

10) Recheck any post-approval discount

In the baseline fixture, selling price is 120 and governed cost is 75, producing a 37.5% margin that passes a 30% floor. Add a 12% discount later and effective price falls to 105.60, below the 107.14 floor. The old approval is invalid and the decision must be rebuilt.

11) Exceptions require an owner and expiry

Below-floor pricing defaults to REPRICE. It becomes EXCEPTION only when the exception is explicitly approved, has an owner, and has not expired. Missing ownership, missing expiry, or an expired exception cannot create a permanent below-floor authorization.

12) Core evidence contract

Each decision keeps the following fields traceable. A percentage without cost scope, discount, and evidence is not a complete pricing decision.

13) Typed states prevent percentage theater

ACCEPT means effective price clears the floor with decisive evidence present. REPRICE means the price is below floor or lacks a valid exception. EXCEPTION means below-floor pricing has a valid time-bounded approval. HOLD preserves incomplete evidence, and DISPUTED preserves an incompatible cost scope. No attractive percentage overrides these states.

14) Transfer: recompute from changed evidence

In the transfer fixture, a 12% discount is added, payment_cost rises, and a high-support customer moves to another service tier. With selling price 130, governed cost 81.5, and effective price 114.4, margin is about 28.76% while the 30% floor requires about 116.43. The result is REPRICE; the baseline verdict must not be copied.

15) Lab, assessment, and source freshness

The offline lab has eight fixtures: baseline, 50%-markup confusion, post-approval discount, support excluded from scope, missing evidence, valid exception, expired exception, and transfer. All checks are deterministic and require no credentials or customer data. QuickBooks and FinOps sources were rechecked on 2026-09-15; material semantic change before review due requires a new package version rather than silent mutation of the frozen Bible.