Pricing for profit
Markup vs margin: how to price for profit
Markup and margin sound like the same thing. They are not. Mixing them up is one of the most common reasons small businesses look profitable on paper and run out of cash anyway. Understanding the difference takes about two minutes — and it can change how you price for the rest of your business life.
The simple difference
Both numbers describe profit, but they measure it against different things.
- Markup is the percentage you add on top of your cost. If something costs you R100 and you mark it up by 50%, you sell it for R150.
- Margin is the percentage of your selling price that is profit. If you sell something for R150 and R50 of that is profit, your margin is 33.3%.
Same product, same R50 profit. 50% markup, 33.3% margin. Both numbers describe exactly the same deal — they just start counting from a different place.
Why this confuses everyone
When a supplier says “there’s a 50% margin in this,” do they actually mean 50% margin, or do they mean 50% markup? It matters. A product with a 50% markup leaves you with 33.3% margin. A product with a 50% margin requires a 100% markup. The difference is hundreds of rands on every sale once volumes grow.
The safest habit is to assume nothing. When someone quotes a percentage, ask which one they mean and run it through the calculator above before you commit.
A worked example
Say you import phone cases. Each one costs you R80 landed (price + shipping + clearing). You want to sell them at retail.
- Markup approach. You decide to apply a 100% markup. Selling price becomes R160. Your profit is R80 per case. Your margin is 50%.
- Margin approach. You decide you want a 60% margin. Selling price becomes R200 (because R80 ÷ 0.40 = R200). Profit is R120 per case. Markup is 150%.
Both are valid. Both come from the same R80 cost. The choice changes everything downstream — your price point, your volumes, what kind of customer you attract, how you compete.
When to use which
Markup is easier to set during pricing. You take your cost, multiply by 1.5, and you have your price. Most small business owners think this way naturally.
Margin is more useful for measuring health. If you want to know whether a product line is genuinely profitable, ask “what margin does it make?” not “what markup did I apply?” — because margin tells you what share of every Rand of revenue is yours to keep.
In practice: think in markup when pricing a new product, think in margin when reviewing performance.
The VAT trap (South Africa)
If you’re registered for VAT, the 15% you add to your selling price isn’t profit — you owe it to SARS. Always run markup and margin calculations on the VAT-exclusive prices, not the prices customers see on the shelf. Otherwise you’ll think you’re making 30% margin when half of that is really government money passing through your account.
Common pitfalls
- Forgetting overheads. A 30% margin sounds healthy. But if rent, electricity, and salaries eat 25% of revenue, you’re running on a 5% net margin — one bad month away from trouble.
- Pricing off the supplier’s suggested retail. What works for a national chain rarely works for a small shop with different volumes and overheads. Calculate your own number.
- Forgetting payment fees. Card-machine fees, online payment gateways, and platform commissions reduce what you actually receive. Build these into your “cost” before calculating markup or margin.
- Discounting blindly. A 20% discount on a 40% markup item leaves you with very little profit. A 20% discount on a 100% markup item still leaves comfortable room. Know your margins before you discount.