Aqid ERPMargin and mark-up are not the same percent
Both measure the same profit, against different numbers. Margin is the profit as a share of the selling price; mark-up is the profit as a share of the cost. An item that costs 80 and sells for 100 makes 20: a 20% margin (20 ÷ 100) and a 25% mark-up (20 ÷ 80). Mixing them up is the commonest pricing mistake: a shop that adds 20% to its costs and believes it earns a 20% margin earns 16.67%.
- Margin = (price − cost) ÷ price × 100.
- Mark-up = (price − cost) ÷ cost × 100.
- Price for a margin you want = cost ÷ (1 − margin). A 30% margin on a cost of 70 is 70 ÷ 0.70 = 100.
- Price for a mark-up you want = cost × (1 + mark-up). A 30% mark-up on 70 is 91, a 23.08% margin.
Margin and mark-up side by side
The same profit, read both ways. A margin can never reach 100%; a mark-up has no ceiling.
| 10% margin | 11.11% mark-up |
|---|---|
| 15% margin | 17.65% mark-up |
| 20% margin | 25% mark-up |
| 25% margin | 33.33% mark-up |
| 30% margin | 42.86% mark-up |
| 40% margin | 66.67% mark-up |
| 50% margin | 100% mark-up |
| 60% margin | 150% mark-up |
A worked example: pricing for a 35% margin in Saudi Arabia
A retailer buys an item for SAR 52.00 before VAT and wants a 35% margin. VAT is added on top of the price and paid over to ZATCA, so it stays out of the margin.
| Price before VAT: 52.00 ÷ (1 − 0.35) | 80.00 |
|---|---|
| Profit: 80.00 − 52.00 | 28.00 |
| Margin: 28.00 ÷ 80.00 | 35% |
| Mark-up: 28.00 ÷ 52.00 | 53.85% |
| Shelf price with 15% VAT: 80.00 × 1.15 | 92.00 |
Gross margin and net margin
The calculator works one item at a time, which is gross margin: the price less what the item itself cost. Net margin takes the whole business: sales less every cost, rent, salaries and the rest included, divided by sales. A product with a healthy gross margin can still sit inside a business that loses money, which is why the income statement shows both.
To find a business's gross margin for a month, use its sales as the price and its cost of sales as the cost: the answer is the gross margin percentage on the income statement.
Where pricing by margin goes wrong
- Putting VAT in the price: a 115 shelf price with 15% VAT is 100 of sales, not 115. Work the margin on 100; the percentage calculator's "net from gross" mode gives it.
- Leaving costs out of the cost: freight, customs duty and the payment fee on each sale belong in the unit cost.
- Discounting a margin: 10% off a price with a 20% margin does not leave 10%. On 100 with a cost of 80, the new price is 90 and the margin 11.11%.