Adding 40% to a product’s cost gives you a 28.57% gross margin, not 40%. That is a substantial pricing difference if the business is relying on the larger figure to cover its other costs.
Margin measures gross profit as a percentage of selling price. Markup measures it as a percentage of cost. A product costing €36 and selling for €60 has a 40% gross margin and a 66.67% markup. To price for a target gross margin, divide cost by one minus the margin as a decimal. Use a consistent VAT and cost basis, then check what the order leaves after its other costs.
Illustrative stock photograph: Luke Heibert on Unsplash.
Margin and markup use different starting points
Gross profit is sales less the cost of the goods sold. For a single product, subtract its cost from its selling price.
The same €24 gross profit can then be expressed in two ways:
- Gross margin: €24 divided by the €60 selling price, multiplied by 100 = 40%.
- Markup: €24 divided by the €36 cost, multiplied by 100 = 66.67%.
In formula form:
Gross margin % = (selling price − cost) ÷ selling price × 100.
Markup % = (selling price − cost) ÷ cost × 100.
When cost is positive and selling price is above cost, markup is the higher percentage because it divides the same profit by a smaller number. The sale has not become more profitable simply because you describe it using markup. Xero’s margin and markup guide explains this distinction.
Set the price from the margin you actually want
If you want a 40% gross margin on a €36 product cost, the calculation is:
Selling price = €36 ÷ (1 − 0.40) = €60.
If you add a 40% markup instead, the price is €36 × 1.40 = €50.40.
| Illustrative pricing method | Price excluding VAT | Gross profit | Gross margin |
|---|---|---|---|
| 40% markup on €36 cost | €50.40 | €14.40 | 28.57% |
| Price for a 40% gross margin | €60.00 | €24.00 | 40.00% |
The €9.60 difference is a gap between proposed prices. It is not automatically lost profit: customers may buy different quantities at each price.
Here, 40% is an assumed target, not a recommended benchmark for Irish retail. A useful target depends on the other costs the margin must cover, your product mix and what customers will pay.
Take VAT out of the comparison consistently
For a VAT-registered retailer making taxable sales, compare sales excluding VAT with product costs excluding recoverable VAT. VAT you cannot recover remains part of the cost. Recovery depends on the purchase, its business use and the applicable conditions, not registration alone. Revenue explains who can reclaim VAT and the restrictions.
Assume our fictional product is subject to Ireland’s standard 23% VAT rate. A consumer price of €73.80 includes €13.80 VAT and gives net sales of €60:
€73.80 ÷ 1.23 = €60.
Against the €36 product cost, gross profit is €24 and gross margin is 40%. Treating the full €73.80 customer payment as sales while keeping the €36 cost would overstate gross profit and distort the margin.
Revenue’s current rates table lists 23% as the standard rate. Check the rate for your own goods; this example does not apply 23% to every product. A business that is not VAT registered needs a cost and sales basis appropriate to its own position.
A correct formula cannot fix the wrong product cost
Before changing a price, check the €36 input.
Does it reflect the supplier cost of the goods sold, inbound freight and duty where applicable? Has a supplier increase reached your shop system? Are you using recoverable VAT consistently? Is packaging already included in that figure, or will it be charged again under fulfilment?
This is where the useful pricing work starts. A neat percentage built on an old supplier price or a missing shipping charge can support the wrong decision.
Buying stock is also different from selling it. The amount paid for this month’s stock purchases is not automatically this month’s cost of sales. Our inventory accounting guide explains the records and cost treatment behind that distinction.
Use the same agreed cost basis across products and periods. If it changes, show the change rather than interpreting a different calculation as better performance.
Test the order, as well as the product
A 40% gross margin does not mean the business keeps 40% of sales as final profit. The €24 must still meet costs outside the product-cost figure.
Follow the same fictional product through three prices. Assume one unit per order, a €36 product cost, €5 variable fulfilment cost and €8 advertising allocated per order. For this illustration only, payment fees are 2% of the VAT-inclusive customer charge, rounded to cents. Your provider’s actual percentage, fixed fees and charging basis may differ.
All sales and costs below exclude recoverable VAT, except the explicitly labelled customer charge.
| Per-order illustration | Target price | 10% discount | Lower market price |
|---|---|---|---|
| Selling price excluding VAT | €60.00 | €54.00 | €50.00 |
| Customer charge including 23% VAT | €73.80 | €66.42 | €61.50 |
| Product cost | €36.00 | €36.00 | €36.00 |
| Gross profit | €24.00 | €18.00 | €14.00 |
| Gross margin | 40.00% | 33.33% | 28.00% |
| Illustrative payment fee | €1.48 | €1.33 | €1.23 |
| Variable fulfilment | €5.00 | €5.00 | €5.00 |
| Allocated advertising | €8.00 | €8.00 | €8.00 |
| Amount left after these costs | €9.52 | €3.67 | −€0.23 |
The discount removes €6 from net sales but only €0.15 from the rounded payment fee. What remains after the costs shown falls from €9.52 to €3.67.
If customer evidence suggests €50 is the price the market will accept, the target-margin formula does not make €60 achievable. At €50, this model leaves a small loss before fixed overheads. You need to change the economics or reconsider the offer.
The final row is a management view after the costs shown, including allocated advertising. It is not net profit or a complete variable-cost contribution calculation. Advertising spend does not necessarily move with orders, so €8 is not a promise that each extra order costs another €8.
Returns, refund-related costs and fixed overheads are excluded from this illustration. Include them where relevant before judging the offer. Do not deduct any cost twice. Our contribution margin guide covers the wider cost layers and their definitions.
What to check before changing the price
Start with one important product on one channel, especially if its cost has risen or it is regularly discounted.
- Reconcile the inputs. Ask the person maintaining product costs to check recent supplier invoices, freight, duty and VAT treatment. Ask whoever reconciles sales to confirm the actual net selling price after discounts and refunds. Use a recent completed month, not a headline list price.
- Name the target. The owner or commercial lead should say whether “40%” means markup, gross margin or another measure. Record the cost basis and the euro amount needed to cover the remaining costs.
- Test the realistic price. Compare the proposed price with actual conversion and customer evidence, then calculate what the order leaves after fees, fulfilment and advertising. If the acceptable price cannot support the economics, review sourcing, delivery terms, the offer or whether to sell it.
- Check the commitment. More orders may require more advertising, packing capacity and stock bought before the cash arrives. Do not use unchanged costs and unlimited capacity to justify a promotion.
- Assign the action and review date. Give the price or cost change to a named person. At the next monthly review, compare realised net price, unit sales, returns and the amount left per order and in total. A higher margin percentage with fewer profitable sales may leave the business worse off.
Hold a pricing decision if material costs are missing. Resolve those inputs first. The useful question is whether a credible price leaves enough money for the business, not whether a spreadsheet displays the desired percentage.
If reliable monthly reporting is the missing piece, our ecommerce accounting support connects reconciled records with margin and cash decisions. Reporting depth and product or channel analysis depend on the agreed scope and available records.
Book a Finance Fit Call to discuss the recurring finance support your business needs.
FAQs
Is 40% markup the same as 40% margin?
No. On a €36 cost, a 40% markup gives a €50.40 price and a 28.57% gross margin. A 40% gross margin requires a €60 price. These prices exclude VAT in the example.
How do I calculate a selling price from a target margin?
Divide cost by one minus the target gross margin expressed as a decimal. For a 40% target, divide cost by 0.60. Check the cost basis and whether customers will pay the resulting price.
Should I use margin or markup?
Markup describes the addition to cost. Gross margin shows how much of sales remains after cost of sales. You can use both, provided the label and cost basis are clear. Gross margin is usually the more useful starting point for comparing what sales leave to cover other expenses.
Should VAT be included in margin calculations?
For a VAT-registered business making taxable sales, use sales excluding VAT and exclude recoverable purchase VAT from costs. Irrecoverable VAT remains a cost. Check your own VAT position and the recovery conditions before applying that approach.
What is a good gross margin for an Irish retailer?
There is no universal percentage. It depends on the costs included, the other expenses to cover, product mix and demand. Test both the percentage and the euros left after serving the orders against your own business costs.
Does a higher gross margin always mean more profit?
No. Selling fewer units, paying more to acquire orders or incurring higher fulfilment and return costs can reduce total profit even when the gross margin percentage rises. Compare actual sales, the remaining cost layers and total contribution.
