Margin or Markup? How to Price Your Products So You Make a Profit

You buy goods for 100 and sell them for 150. You made 50, so business is good. Or is it? After transport, packaging, phone credit, a stall fee and your own time, the profit may be close to zero. Pricing is one of the most important decisions in a small business, and it is often done by guessing. A little arithmetic can change that.

Start with your real costs

Your cost is not only what you paid for the item. Include everything it takes to get the item to the customer: transport, packaging, fees, a share of rent or a stall fee, phone credit, and the tax you must pay if there is one. If you make the product yourself, count your materials, and put a value on your own time. Many businesses look profitable only because the owner works for free.

Margin and markup are not the same

Both describe profit as a percentage, but they measure it against different things.

Markup is the profit as a share of your cost. Margin is the profit as a share of the selling price.

Here is an example. A product costs you 100. You add a 50% markup, so you sell it for 150. Your profit is 50. As a share of the price, that is 50 divided by 150, which is 33%. So a 50% markup gives a margin of only 33%.

The difference matters. If you say "I want a 30% margin" and you add 30% to your cost, you will end up with less profit than you planned. Mixing the two up is a very common mistake.

How to price for the margin you want

To get a margin of 30% on a cost of 70, divide the cost by one minus the margin: 70 divided by 0.70 gives a price of 100. Your profit is 30, which is exactly 30% of 100.

You can do this with the Profit and price calculator. In the first part, enter what an item costs and what you sell it for to see your profit, margin and markup. In the second part, enter your cost and the profit you want, choose whether it is a margin or a markup, and read the price to charge.

Check your break-even point

Fixed costs, such as rent or a stall fee, must be paid whether you sell one item or a hundred. The break-even point tells you how many sales you need before you make any profit.

For example, your fixed costs are 200 a month. You sell an item for 10, and it costs you 6 to buy and pack, so each sale earns 4. You need 200 divided by 4, which is 50 sales just to cover your costs. Sale number 51 is the first real profit. The third part of the profit calculator does this for you.

If the number of sales you need is higher than the number you can realistically make, you have three choices: raise the price, lower your costs, or reduce your fixed costs.

Handle discounts carefully

A discount cuts profit more than people expect. If your margin is 30% and you give a 10% discount, your profit does not fall by 10%. It can fall by about a third. Before you offer a sale, work out the new price and the new profit. The percentage calculator shows the discounted price in a second.

Other pricing tips

Know what your competitors charge, but do not copy blindly. Their costs are not your costs. Do not compete only on being the cheapest; compete on trust, service and speed. Review your prices every few months, because your costs will change. Keep records of every sale and expense so you know the real numbers. And if you sell to businesses or on credit, send a clear invoice; our guide on writing an invoice explains what to include.

Borrowing to grow?

Be careful before you borrow to buy stock. Work out whether the extra profit will cover the repayments. Our guide to how loan interest and repayments really work helps you check this before you sign.

Know your numbers

You do not need to be an accountant. You need your costs, your price and a calculator. Ten minutes with the numbers can show you which products make you money and which only keep you busy. You can find more free tools on the tools page.