Profit margin and pricing: how to set a selling price

What is profit margin, and how is it different from markup?

Profit margin is the share of the selling price that stays with you. Markup is how much you add on top of cost; for the same product the two always come out different.

Both describe the same profit, just divided by a different number. Margin divides profit by the selling price; markup divides it by cost. Because the price is bigger than the cost, margin is always the smaller figure. Plenty of shop owners call both of them “my profit percentage”, and that's exactly where the confusion starts.

Use whichever you like, as long as you don't mix them up. Markup is the easy way to think when you set a price. Margin is the better way to watch profit, because it tells you how much of every ₺100 in the till is actually yours.

Why isn't a 50% markup a 50% margin?

Because you added 50% of the cost, but margin is measured against the price. Sell a candle that costs ₺96 for ₺144 and you make ₺48; that's 33.3% of the price, not 50%.

If you really want a 50% margin, the candle has to sell for ₺96 ÷ 0.50 = ₺192. Round it to ₺200 and the margin is 52%: ₺104 profit on a ₺200 sale. The ₺56 in between is what you've been leaving on the table with every candle without noticing. If you make candles, soap or biscuits, the cost and profit tracking for home makers page shows the same sum inside the app.

You can read the table both ways. Doubling the cost gives a 50% margin; for a 60% margin you multiply the cost by 2.5. The shortcut for converting is: Margin = Markup ÷ (1 + Markup). For a 50% markup that's 0.5 ÷ 1.5 = 0.333, or 33.3%.

How do you work out a selling price from a target margin?

Divide the cost by (1 − target margin). For a 60% margin, divide by 0.40; for 50%, by 0.50; for 70%, by 0.30.

The usual mistake is reading a 60% margin as “60% on top of cost” and labelling the mug ₺144. At that price the margin is 37.5%, and ₺81 stays on the table with every mug. The product cost and stock tracking for workshops page shows how cost per piece comes out of clay, glaze and boxes.

The formula only works if the cost is right. Include packaging, a share for the pieces that crack in the kiln, and today's buying price for each material. If you price with what last month's clay cost you, you'll pay the difference out of your own pocket when you restock. We go through it step by step in how to calculate unit cost.

How should you round the price the formula gives you?

Round up, to a number customers can read at a glance. Rounding down takes you below your target margin; you can choose to do that, but only after you've worked out where the margin lands.

₺5 a cup looks small, but on cheap items nothing moves the margin like rounding. On a ₺30 drink, the gap between ₺85 and ₺90 is two points of margin; sell 100 lattes a day and it's ₺15,000 a month. For the whole menu, see café stock tracking and coffee cost per cup.

• End prices the same way. Prices ending in 0 or 5 are easy on the eye and easy on the change drawer.
• Leave room for small rises. Rounding a little above the target means the next small supplier increase doesn't force a new label straight away.
• Check the market last. Work out the price from your cost first, then compare with what's around you. Do it the other way and you can end up selling below cost.

Should you work out margin with VAT or without?

Without. The tax inside the price your customer pays isn't your income; count it in the margin and you make a profit on paper, not in the till.

In practice: the ₺225 or ₺90 the formula gives you is the price before tax. You add whatever tax applies to your product before you write the label or the menu. The reverse holds too: if you're working out the margin from a menu price, take the tax out first. How tax on your purchases should be treated depends on your business's tax position; if you're not sure, ask your accountant once and do it the same way every time. What matters is treating both sides with the same rule.

What's the difference between gross margin and the profit you keep?

Gross margin only takes off the cost of materials; rent, bills and wages haven't been paid yet. The profit you keep is what's left of gross profit once fixed costs are out.

An example: the workshop sold ₺40,000 this month, and the materials in what it sold cost ₺14,000. Gross profit is ₺26,000, a 65% gross margin. If rent, electricity, gas and the assistant's wage come to ₺18,000 a month, what you keep is ₺8,000, or 20% of sales. The 65% looks great; the number that counts is 20%.

So don't pick a target margin out of thin air. Start from what your fixed costs are each month and how many products you sell; the margin has to be high enough to carry that load. We work out how much you need to sell to cover fixed costs in how to calculate your break-even point.

Is every product actually making money?

You can't tell from total profit; you need each product's sales, cost and margin side by side. The product selling at a loss usually isn't at the top or the bottom of the list, but hiding in the middle.

The week adds up to ₺16,750 profit, and from the outside everything looks fine. But the raspberry tart loses ₺8 on every sale. Its price was set a year ago, raspberries have gone up several times since, and nobody went back to do the sum. Best sellers and slow sellers both catch your eye; the one in the middle loses money quietly. To get cake and pastry costs from the recipe, have a look at patisserie cost calculation and stock tracking.

When you find a loss-maker you have three options: raise the price, change the recipe or the portion, or keep it on purpose. Some products bring people through the door; even if you keep one, know what it costs you.

How do you set a selling price, step by step?

Start from cost, choose a margin, work out the price with the formula, round it, and check after you've sold some. Keep that order; starting from the market leaves cost until last.

1. 1Work out unit costFind what one product costs you, including packaging and labels. Use today's buying price for each material, and don't forget waste and batches that come out short.
2. 2Choose a target marginLook at your fixed costs and how much you sell; the margin has to carry rent and bills. Not every product needs the same margin.
3. 3Work out the priceSelling price = Cost ÷ (1 − Target margin). For a ₺90 cost and a 60% target, that's ₺225.
4. 4Round up, then check the marketRound to a price customers read easily. Then compare with prices around you; if you're far below, recheck your cost, and if you're far above, rethink how you present it.
5. 5Add tax, write the labelThe formula gives a price excluding VAT. Add the tax before it goes on the label or the menu.
6. 6Check after you've soldAfter a few weeks, look at the margin product by product. If an ingredient went up or batches came out short, the price needs working out again.