When to use the margin calculator
Use it when you set prices, check what a supplier’s price rise does to your profit, or need to know how much you can pay for an item and still keep the margin you want. The margin here is the gross margin on one sale: the profit before rent, wages, marketing and your other running costs.
Margin and markup are not the same
Margin divides the profit on a sale by the selling price. Markup divides the same profit by the cost. On any profitable sale the cost is smaller than the price, so the markup percentage always comes out higher than the margin.
Take an item that costs you 80 and sells for 100. The profit is 20. As a margin that is 20%, because 20 is a fifth of the 100 price. As a markup it is 25%, because 20 is a quarter of the 80 cost. It is the same sale and the same profit, described by two different percentages. Mixing them up is a frequent cause of pricing errors, and margin vs markup sets the two side by side.
How to use the three modes
- I know the price and the cost gives your margin, with the markup and the profit per item alongside it. Use it to check the prices you charge now.
- I know the cost and the margin I want gives the selling price that delivers that margin, plus the equivalent markup. Use it to price a new product.
- I know the price and the margin I want gives the most you can pay for the item and still earn that margin, plus the equivalent markup. Use it when the market sets the price and you are negotiating with suppliers.
A target margin has to stay below 100%. Profit can never be the whole selling price, because that would mean the item cost you nothing.
Reading the result
A margin of 20% means 20 out of every 100 you take in sales is left after paying for the items. That amount has to cover your other costs before any of it becomes profit. A negative margin means the item costs more than you sell it for, so every sale loses money before any other expense.
The margin a business needs depends on its running costs and on how many items it sells, so there is no single right figure. Compare margins across your own products and over time.
Common pricing mistakes
- Adding the margin you want to the cost. Adding 40% to the cost gives a 40% markup, which is a margin of only about 28.6%.
- Leaving costs out of the item cost, such as inbound shipping or packaging, which makes the margin look better than it is.
- Using a price that includes sales tax or VAT. The tax is passed on to the government, so including it inflates the margin.
- Underestimating discounts. On the item above, a 10% discount takes the price to 90 and halves the profit per item, from 20 to 10.
Related tools
The markup calculator works from the same price and cost but gives markup as the main result. Gross profit margin applies the same idea to a whole business, using total sales and the cost of goods sold. The break-even calculator uses a similar profit per unit, the price minus all variable costs, to show how many units you need to sell to cover your fixed costs.