Margin or markup: how to price what you sell

What is the difference between margin and markup?

Both start from the profit on an item, the selling price minus the cost. Margin divides that profit by the selling price; markup divides it by the cost. An item bought for SAR 70 and sold for SAR 100 makes SAR 30 of profit: a 30% margin, but a markup of about 42.9%. Same item, two different percentages.

Margin is what your accounts show, because gross profit is reported against sales. Markup is how many shop owners think when they price, because it starts from what they paid. Both are fine as long as everyone in the business knows which one a number means.

Why does adding a percentage to cost give less margin than planned?

Adding 30% to the cost does not give a 30% margin, because the margin is measured on the higher selling price. An item that costs SAR 70 with 30% added sells for SAR 91, a profit of SAR 21, which is a margin of only about 23%. The bigger the percentage, the bigger the gap.

This matters when a target is set as a margin, for example by a partner or a lender reading your profit and loss, and prices are set by adding the same percentage to cost. Every item ends up below the target, and the shortfall only shows when the month is closed.

How do you set a price from a target margin?

Divide the cost by one minus the target margin. For a 30% margin on a cost of SAR 70, divide 70 by 0.70 and the price before VAT is SAR 100. Then add 15% VAT for the price the customer pays, SAR 115, and round to a price that suits your shelf.

1. Work out the full cost of one unit before VAT, including freight and customs duty.
2. Choose the margin you need on this item or category.
3. Divide the cost by one minus the margin to get the price before VAT.
4. Add 15% VAT to get the shelf price the customer pays.
5. Round the shelf price, then recalculate the margin on the rounded price.
6. Check the price against what customers will pay, and adjust the margin or the buying price if needed.

A margin is always below 100%, because it is a share of the price. A markup has no upper limit.

What belongs in the cost of an item?

The cost is everything you paid to get the item onto your shelf, before VAT: the supplier's price after any discount, freight to your store, customs duty on imports and any fees you pay per unit. If you are registered for VAT and can deduct the VAT you paid, that VAT is not a cost and stays out.

• Supplier price after trade discounts and rebates you are sure to receive.
• Freight and delivery to your store, spread over the units in the shipment.
• Customs duty on imported goods.
• Per-unit costs such as packaging you add before selling.
• Leave out VAT you can deduct, and leave out rent and salaries, which are covered by the margin.

If the cost you use is only the supplier's invoice price, your real margin is lower than the one you see. Use the same cost in your pricing and in your stock valuation, so the margin you planned is the margin your accounts report.

Should prices include VAT?

Calculate cost, price and margin before VAT, because the VAT you collect belongs to ZATCA, not to you. But the price you display to consumers must include VAT: the Ministry of Commerce states that the price on the shelf includes VAT, is the final price and must match the price charged at the till.

To find the VAT inside a shelf price, multiply it by 15 and divide by 115. A shelf price of SAR 115 contains SAR 15 of VAT and SAR 100 before VAT. Your simplified tax invoice then shows the VAT, or states clearly that the total includes VAT at 15%.

What does a discount do to your margin?

A discount comes straight off the profit, so it cuts the margin by more than its own percentage. An item with a SAR 70 cost and a SAR 100 price has a 30% margin. Take 10% off and the price is SAR 90, the profit SAR 20 and the margin about 22%. A third of the profit has gone for a tenth off the price.

Before an offer, work out how many more units you must sell to keep the same profit in riyals. At a 30% margin, a 10% discount needs half as many sales again to earn the same SAR amount. If that is unlikely, offer the discount on items with room in their margin, or for a short and fixed period.

How often should you review your margins?

Review margins whenever a supplier changes its price, and look at margin by category every month. A supplier increase that is not passed on quietly shrinks the margin of every unit sold afterwards. A monthly view by category shows which groups carry the shop and which only fill the shelf.

How DynamoOS helps

Dynamo Inventory values stock as it moves, so each item's cost is known, and Dynamo Point of Sale sells from the same items and stock as the warehouse. Price lists and pricing rules apply the prices and discounts you agreed, and shift takings reach your books, so margin by item and category is in your reports rather than a spreadsheet.