By the MyToolers team at 182 AdFlow (Dubai & Lahore) · Last updated:
Why margin and markup get mixed up
Ask two shopkeepers how much they make on an item and one may say “25%” while the other says “20%” — about the same item, at the same price. Both can be right. One is talking about markup, the other about profit margin.
Both numbers describe the same profit, but they compare it with different things. Markup compares profit with what the item cost you. Margin compares profit with what you sold it for. Because the selling price is always bigger than the cost (when you make a profit), the margin percentage is always smaller than the markup percentage. If you plan for a 30% margin but add 30% to your cost, you earn less than you expected on every sale.
The two formulas
Profit = Selling price − Cost.
Markup % = Profit ÷ Cost × 100.
Margin % = Profit ÷ Selling price × 100.
Example: you buy a product for 80 and sell it for 100. Profit is 100 − 80 = 20. Markup is 20 ÷ 80 = 25%. Margin is 20 ÷ 100 = 20%. Same item, same profit, two different percentages.
You can convert one into the other. Margin = Markup ÷ (1 + Markup), so a 25% markup is 0.25 ÷ 1.25 = 20% margin. Markup = Margin ÷ (1 − Margin), so a 50% margin needs 0.5 ÷ 0.5 = 100% markup — you must double your cost.
How to set a price from a target margin
Many businesses decide the margin they need first, because margin tells you how much of every sale is left to pay rent, salaries and other running costs. To turn a target margin into a price, use: Selling price = Cost ÷ (1 − Margin).
Example: an item costs 80 and you want a 30% margin. Price = 80 ÷ (1 − 0.30) = 80 ÷ 0.70 = 114.29. Check it: profit is 114.29 − 80 = 34.29, and 34.29 ÷ 114.29 = 30%.
Now compare what happens if you simply add 30% to the cost instead: 80 × 1.30 = 104. Profit is 24, and the margin is only 24 ÷ 104 = 23.1%. On this one item you collect 10.29 less than you planned. Across hundreds of sales a month, that gap becomes serious money.
A worked example: pricing phone covers
A mobile accessories shop buys 50 phone covers for AED 1,000, and pays AED 150 to have them shipped to the shop. The cost per cover is not just 1,000 ÷ 50 = AED 20; it is (1,000 + 150) ÷ 50 = AED 23. This is called the landed cost, and it is the number your prices should be built on.
The owner wants a 40% margin. Price = 23 ÷ (1 − 0.40) = 23 ÷ 0.60 = AED 38.33. Shops usually round to a neat number, so the owner chooses AED 39. Profit is 39 − 23 = AED 16, the margin is 16 ÷ 39 = 41.0%, and the markup is 16 ÷ 23 = 69.6%.
VAT changes the picture. If the shop is VAT-registered in the UAE and AED 39 is the shelf price including 5% VAT, the VAT belongs to the government, not the shop. The price before VAT is 39 ÷ 1.05 = AED 37.14. Profit is 37.14 − 23 = AED 14.14, and the real margin is 14.14 ÷ 37.14 = 38.1% — below the 40% target. To keep 40% after VAT, the shelf price needs to be at least 38.33 × 1.05 = AED 40.25. Always work out margin on the price before VAT, and confirm current VAT rules with the Federal Tax Authority (or the FBR and provincial authorities in Pakistan).
Including fees and commissions
If a delivery app, marketplace or card machine takes a percentage of each sale, that percentage comes out of the selling price, so it must be part of the formula: Selling price = Cost ÷ (1 − Margin − Fee).
Example: the same cover costs AED 23, the target margin is 40%, and suppose a platform charges 10% of the sale (check the actual rate in your own contract). Price = 23 ÷ (1 − 0.40 − 0.10) = 23 ÷ 0.50 = AED 46. Check: the fee is 10% of 46 = 4.60, profit is 46 − 23 − 4.60 = AED 18.40, and 18.40 ÷ 46 = 40%.
Selling at the shop price of AED 39 on that platform would leave 39 − 23 − 3.90 = AED 12.10, a margin of 31%. This is why many businesses keep separate price lists for walk-in and online sales.
How discounts eat your margin
A discount comes straight out of profit, not out of cost. Take the item that costs 80 and sells for 100, with 20 profit. A 10% discount drops the price to 90 — and profit to 10. The customer saved 10%, but you lost half your profit on that sale.
To earn the same total profit at the discounted price, you would have to sell twice as many units. Before running a sale, work out the new margin and ask whether the extra volume is realistic.
Common mistakes to avoid
Using markup and margin as if they were the same number, especially when a supplier, partner or accountant uses the other one.
Pricing from the purchase price only and forgetting shipping, customs, packing, wastage and payment fees.
Calculating margin on a VAT-inclusive price, which makes profit look bigger than it is.
Rounding prices down out of habit — rounding AED 38.33 down to AED 38 cuts the margin to 39.5%.
Never updating prices when supplier costs rise. Recheck your margins whenever you receive a new purchase invoice.
Treating gross margin as take-home profit. Rent, salaries, utilities and other running costs still have to be paid out of it.
How the MyToolers percentage calculator helps
The free percentage calculator covers each step in this guide without a spreadsheet. Use “what percent one number is of another” with your profit and selling price to get the margin, or with your profit and cost to get the markup.
Use “percentage increase between two values” from your cost to your price — for example 80 to 100 gives +25%, which is your markup. And use “a number increased by a percentage” to add a markup to a cost, or add 5% VAT to a price before VAT. The answers update as you type.