Pricing is where small businesses quietly leave the most money on the table — usually because of a single confusion between two words that sound similar and mean very different things: margin and markup.
Margin vs markup — the costly mix-up
Markup is your profit as a percentage of what something cost you. Margin is your profit as a percentage of what you sold it for. They're never the same number, and the gap matters. Buy something for £40 and sell it for £60, and you've got a 50% markup (£20 on top of £40) but only a 33% margin (£20 out of £60).
The mistake that drains profits: an owner decides they want a '40% margin', but prices by adding 40% to cost — which is only a 40% markup, and a 29% margin. They've under-priced every single sale and don't realise it. This calculator takes the margin you actually want and works backwards to the correct price.
'Add 50% to cost' feels like a 50% profit. It isn't — it's a 33% margin. Every business that prices by markup while thinking in margin is quietly poorer than it thinks.
Getting to the right price
To hit a target margin, you don't add a percentage to cost — you divide the cost by (1 minus the margin). For a 40% margin on a £40 item: £40 ÷ 0.6 = £66.67. Now 40% of that selling price is profit, exactly as intended. Once you can price to a real margin, you can set margins deliberately by product, protect yourself when costs rise, and stop the slow leak that comes from pricing on gut feel.
Common questions
What's a good profit margin for a small business?
It varies hugely by sector — a supermarket runs on low single-digit margins and a consultant might run on 70%+. What matters is that your margin covers your fixed costs and leaves genuine profit at your realistic sales volume. Use the break-even calculator alongside this one to check.
Why can't my margin be 100% or more?
Margin is profit as a share of the selling price, so it can only approach 100%, never reach it — 100% margin would mean the item cost you nothing. Markup, which is profit as a share of cost, can exceed 100% (a £10 item sold for £30 is a 200% markup but a 67% margin).
Should the price include VAT?
This calculator works in pre-VAT (net) figures, which is how you should think about your actual margins. If you're VAT-registered you add VAT on top of this price when you invoice; use the VAT calculator for that step.