Is your margin what you think it is?
Enter the cost and the selling price; see the profit, your margin on the sale and your markup on the cost side by side.
What the item costs you, excluding VAT
What you take from the customer, excluding VAT
Enter the cost and selling price; your profit appears here.
Enter the amounts excluding VAT. VAT is money you collect from the customer and pass on, not your earnings; counted in, it makes the margin look higher than it is.
Margin and markup are not the same thing
The margin is calculated against the selling price, the markup against the cost. One sale produces two different percentages, and most small businesses price wrongly because they use one in place of the other.
Put simply: add half the cost again as profit and your markup on cost is fifty per cent, but your margin on the selling price drops to a third. What is in your head is fifty per cent; what reaches your pocket is a third.
Which one you use is a personal choice; the dangerous thing is mixing them. Use the same one throughout, whether you are talking to a supplier, your accountant or your own books.
- Profit = selling price - cost
- Margin = profit / selling price
- Markup = profit / cost
Setting the price from the margin you want
Most traders work from the wrong end: they set the price and then look at the margin. Yet if you have a target margin in mind, you can get the price straight out of it.
Divide the cost by (1 - target margin) and the result is your selling price. Multiplying the cost by the target margin and adding it on top is a common mistake, and it leaves you below your target.
- Selling price = cost / (1 - target margin)
- As the margin rises the divisor shrinks and the price climbs fast
- A hundred per cent margin is not mathematically possible
What you put into the cost
Getting the margin right depends on getting the cost right. Most calculations only write down the purchase price; freight, commission, packaging, wastage and returns stay outside. When they stay outside, you get a sale that wins on paper and loses at the till.
It is worth keeping two separate numbers: the gross margin, calculated on the cost of the goods alone, and the net profit left after rent, electricity and staff. The first is for pricing; the second tells you whether the business is actually making money.
- Gross margin: the sale minus the cost of the goods
- Net profit: what is left of the gross profit after operating costs
- If you do not record your costs, you cannot know your net profit
When the margin is on paper but not in the till
A high-margin sale is not earnings until the money is collected. In a shop that works on credit, a month that looks profitable can pass in a cash squeeze because of sales that were never collected.
So alongside the margin you have to look at two more things: who owes how much, and how much of it came in this month. Read the customer account statement together with the margin calculation and the picture becomes clear.
Frequently asked
- How is the profit margin calculated?
- You subtract the cost from the selling price and divide what remains by the selling price. You read the result as a percentage. If a quarter of the sale stays with you as profit, your margin is twenty-five per cent.
- What is the difference between margin and markup?
- The margin divides the profit by the selling price, the markup by the cost. For the same sale, the margin always comes out lower than the markup. Add half the cost again as profit and your markup is fifty per cent while your margin is a third.
- I added thirty per cent profit, is my margin thirty per cent?
- No. The percentage you add on top of the cost is the markup on cost; your margin on the selling price is lower than that. Mixing the two leads you to price below what you were aiming for.
- How do I find the selling price from my target margin?
- Divide the cost by (1 - target margin). Multiplying the cost by the target margin and adding it on top is a common mistake, and it leaves you below your target.
- What is the difference between gross and net profit margin?
- The gross margin deducts only the cost of the goods; the net margin shows what is left after operating costs such as rent, electricity and staff. You make the pricing decision on the gross figure and read whether the business is surviving from the net one.
- Is VAT included in the profit margin?
- No. The VAT you collect from the customer does not stay with you, so you do the calculation on VAT-exclusive amounts. If you use the exclusive cost on the buying side too, the two sides become comparable.
- How far does my margin fall when I give a discount?
- The discount comes straight off the selling price while your cost stays the same, so the margin erodes faster than the discount rate. On a thin-margin product a small discount can take the whole profit; work the new price through the calculator before you give it.
This page is for information only and is not accountancy advice. The calculator shows gross profit and margin; for the effect of tax, VAT and other legal obligations on your profit, consult your accountant, and for current rates and rules see the publications of Gelir İdaresi Başkanlığı, Türkiye's revenue administration.
The margin comes out right when the figures are on the record
In Bi'Bulut sales and expenses sit in the same place; you see both the buying and the selling side of a product from the record. The account statement on the customer card then shows which sale has been paid for and who still owes how much.
See the bookkeeping program