How to price your products: margin and markup with examples in dinars

In short: Markup is calculated on cost and margin on price. Price for the margin you want by dividing cost by (1 minus the margin), work it out on the price before tax, and remember a 10% discount can take half your profit.

You buy an item for 0.800 JOD and sell it for 1 dinar. What is your profit? Say 25% and you are right. Say 20% and you are also right. The gap between those numbers is the gap between markup and margin, and mixing them up is a common cause of wrong prices in shops. Here it is with worked examples in dinars, plus what discounts and tax do to what actually stays in your pocket.

Markup and margin

Markup is calculated on cost: profit divided by cost. In the example, 0.200 ÷ 0.800 = 25%.

Margin is calculated on the selling price: profit divided by price. In the example, 0.200 ÷ 1.000 = 20%.

Both describe the same sale and the same 200 fils of profit. But when you say 'I want 25%', you need to know which one you mean, because the resulting price is different.

Converting between them

This table shows the margin you actually get from each markup you put on cost.

Margin = markup ÷ (1 + markup). Example: 0.25 ÷ 1.25 = 20%.

Setting a price from the margin you want

For a target margin, divide cost by (1 minus the margin). An item costing 0.800 JOD with a 25% target margin: 0.800 ÷ 0.75 = about 1.067 JOD. Then round to a price that is easy to count, and know what rounding does: 1.100 lifts your margin to about 27%, and 1.050 drops it to about 24%.

The classic mistake is adding 25% to cost and thinking you make 25% on sales. 0.800 plus 25% is 1.000, and your real margin is 20%, not 25%. On 3,000 JOD of monthly sales, that gap is worth 150 JOD.

Discounts eat profit faster than you think

An item costing 0.800 sells for 1.000: 200 fils profit. A 10% discount makes the price 0.900, and your profit drops to 100 fils. The discount took 10% off the price but half your profit. To make the same money after the discount, you have to sell twice as many.

So make discounts a deliberate choice: on stock you need to clear before its expiry date, or on an item that brings customers in to buy other things, not a blanket discount on everything.

Sales tax and your price

If your shop is registered for sales tax, the tax your customer pays is not your profit, so calculate margin on the price before tax. An item costing 0.800 JOD before tax, with a shelf price of 1.160 including 16% tax: the price before tax is 1.000 and your margin is 20%, not the 31% the shelf price suggests.

The tax rate on each item, and how it is handled in your books, are questions for your accountant.

Practical pricing rules for a shop

• Know your real cost: the supplier's price plus any delivery you paid.
• Free goods lower your cost: a carton of 12 at 9.600 JOD with one free means 13 units, or 0.738 each instead of 0.800.
• Items whose price customers know, like bread, milk and water, usually carry a smaller margin, so do not stray far from the market.
• Items customers rarely compare, or that set your shop apart, can carry a higher margin.
• Update prices when costs change. An item left at its old price after a supplier increase earns you less every day without you noticing.
• Allow for waste: items that spoil or expire need a margin that covers what is lost.

Let the numbers work themselves out

Once every item has its cost and price, profit becomes a number you see rather than one you guess. In Ghalleh each product has a cost and a selling price, and supplier purchase invoices update the cost, so you see profit as sales minus cost, your best sellers, and what has not sold in 14 days.

When an employee gives a big discount, you can get a notification on your phone and know the same day where part of your profit went. The trial is 14 days free with every feature and no card.

Common questions