Margin and Mark-up Are Not the Same Thing
How to Calculate Profit Margin and Set Prices?
Most people who say "I added a 30% profit" are actually calculating mark-up. We explained the difference between the two and the correct pricing logic with an example.
The phrase "Cost is 100, I added 30%, sold it for 130" sounds like a profit margin. However, this is often a mark-up. Margin and mark-up do not yield the same percentage; when confused, your pricing policy quietly falls apart.
In this article, we separate these two calculations, explain how to move from target profit to price, and show with a practical example how discounts erode your margin.
The difference between margin and mark-up
- Mark-up (based on cost). (Selling Price − Cost) ÷ Cost. Cost is 100, selling price is 130 → mark-up is 30%.
- Profit margin (based on selling price). (Selling Price − Cost) ÷ Selling Price. In the same example, the margin is ≈ 23%.
The same profit of 30 TRY; two different percentages. If you don't clarify which one is meant when "30% profit" is mentioned in a meeting, your team will end up with different prices.
Formula from target margin to price
Selling price (excluding VAT) ≈ Cost ÷ (1 − Target margin).
Example: cost is 100, target margin is 25% → price is 100 ÷ 0.75 ≈ 133.3. If you say "I added 25%" using mark-up, the price becomes 125, while the actual margin drops to 20%.
Cost here should not only be the purchase price. If shipping, waste, commission share, and overhead share are not included, the price will remain too low. Our article on product costs establishes this foundation.
Layers that should be included in the price
| Layer | Example |
|---|---|
| Direct cost | Purchase, import, raw materials |
| Sales-dependent variable | Shipping, commission, payment processing fee |
| Overhead share | Rent, personnel, software (distributed across products) |
| Target profit | Your margin goal |
If the market price is below what you calculated, the problem is not that you "cannot set a price," but that you need to review your cost structure or product mix.
How does a discount erode the margin?
Let's assume a price of 133.3 / cost of 100 / 25% margin. With a 10% discount, the selling price drops to 120. Profit drops to 20, and the margin drops to ≈ 16.7%. A "small discount" has actually wiped out one-third of your target margin.
Therefore, discount authorization must be tied to the margin baseline. The article on discounts and maturity differences completes the financing dimension.
Frequently asked questions
Do I include VAT in the margin?
Calculate your margin based on amounts excluding VAT. VAT is not your profit; you collect and pay it (settled with deductible VAT).
How is cost calculated in service businesses?
Hourly or project cost: total personnel cost + overhead share. Pricing based solely on net salary inflates the margin.
Should every product have the same margin?
No. Traffic-driving products may have low margins, while complementary products can have high margins. The important thing is knowing your average and cash contribution.
Should it be tracked in Excel or software?
No matter where you do the calculation, if your selling price / cost / discount data is not up-to-date, your margin is an illusion. Invoices and inventory costs must be fed from a single source.
In summary: don't confuse mark-up with margin; don't build incomplete costs; don't think of discounts as a "small gesture." Price is the result of these three elements.
By opening a free account on Qolay.App, you can track your sales and cost movements within the same streamlined system.
This article is for general informational purposes only. Pricing is a business decision; tax and cost practices vary depending on the specific case. Consult your financial advisor if necessary.
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