Table of contents
- How do you calculate a product price from cost price?
- How does markup differ from margin?
- What happens to margin when materials get more expensive?
- What discount can a manager give a dealer?
- How do you update a price list after cost price changes?
- How do you avoid selling below cost price?
- What Bimp does and does not do
- FAQ
- Product price = cost price / (1 - desired margin). If a table has a cost price of €45 and the target margin is 35%, the price is 45 / 0.65 = €69.23, rounded to €69.25.
- Markup is calculated on cost price, margin on price. A 40% markup gives a margin of only 28.6%, and a 40% margin needs a 66.7% markup.
- A 10% rise in material costs, from €45 to €49.50, cuts the margin at the old price from 28.6% to 21.4%. A 25% discount for a dealer leads to a sale below cost price.
- In Bimp a switch in the accounting settings highlights the amount in a customer order where the price is below cost price and blocks saving and posting of the document.
Cost-plus pricing sets a product price from cost price with the formula price = cost price / (1 - desired margin). For a table with a cost price of €45 and a 35% margin that is 45 / 0.65 = €69.23. To avoid selling below cost price you need two steps: calculate price from a fresh cost price and turn on a control that blocks the document when the price drops below it. Bimp is a Ukrainian cloud ERP for manufacturers, and both steps are implemented in it.
In the shop a dealer asks for a discount, the manager agrees to 25%, and the cost price of the table has gone up since last quarter. The order is placed and the shipment goes out. The owner learns about the loss from the monthly report. Below we look at how to avoid that.
How do you calculate a product price from cost price?
First you need the cost price of one unit: materials from the specification, labour, a share of shop overheads. Its composition is covered in more detail in the article on how to calculate manufacturing cost. Then there are two methods, depending on what you call the target.
Through markup: price = cost price × (1 + markup).
Through margin: price = cost price / (1 - margin).
Say a table has a cost price of €45 before VAT. The owner wants a 35% margin. By the formula 45 / (1 - 0.35) = 45 / 0.65 = €69.23. The price is rounded to €69.25. The profit on one table is 69.25 - 45 = €24.25, and the margin is 24.25 / 69.25 = 35.0%.
The same table through a 40% markup: 45 × 1.40 = €63. The profit is €18, and this price gives a margin of only 28.6%.
How does markup differ from margin?
Markup measures profit relative to cost price, margin relative to price. The profit is the same, the base is different, so the percentages do not match. For a table at €63: profit €18, markup 18 / 45 = 40.0%, margin 18 / 63 = 28.6%.
The difference causes arguments in meetings. The sales director says “we work with a 40% markup”, the finance director says “our margin is 28%”, and both are right. To compare products and periods, pick one indicator and stick to it.
The conversion between them is: margin = markup / (1 + markup), and markup = margin / (1 - margin).
| Markup | Margin | Price at a cost price of €45 |
|---|---|---|
| 20% | 16.7% | 54.00 |
| 25% | 20.0% | 56.25 |
| 30% | 23.1% | 58.50 |
| 40% | 28.6% | 63.00 |
| 50% | 33.3% | 67.50 |
| 60% | 37.5% | 72.00 |
| 80% | 44.4% | 81.00 |
| 100% | 50.0% | 90.00 |
Check two rows: 50 / 150 = 33.3% and 100 / 200 = 50.0%. The price in the last column equals 45 × (1 + markup), for example 45 × 1.5 = €67.50.
The reverse direction for typical target values:
| Desired margin | Required markup | Price at a cost price of €45 |
|---|---|---|
| 30% | 42.9% | 64.29 |
| 35% | 53.8% | 69.23 |
| 40% | 66.7% | 75.00 |
| 45% | 81.8% | 81.82 |
Example: for a 40% margin the markup is 0.40 / 0.60 = 66.7% and the price is 45 / 0.6 = €75. The Gross profit report shows both markup and profitability, so both numbers can be checked against the calculation. An example of such a report is in the article on a manufacturer’s P&L.
What happens to margin when materials get more expensive?
A price list built on the old cost price gradually loses margin. Suppose the table’s price is €63 (40% markup), and materials have gone up, so the cost price became 45 × 1.10 = €49.50.
| Indicator | Before the rise | After the rise at the old price list |
|---|---|---|
| Cost price, EUR | 45.00 | 49.50 |
| Price, EUR | 63.00 | 63.00 |
| Profit, EUR | 18.00 | 13.50 |
| Markup | 40.0% | 27.3% |
| Margin | 28.6% | 21.4% |
Profit fell from €18 to €13.50, which is 25%, although cost price rose by only 10%. To restore the 28.6% margin, the price has to go up to 49.50 × 1.40 = €69.30, which is also 10%.
Now a discount. A dealer asks for 20% off €63, which is €50.40. Only €0.90 remains above the cost price of €49.50, so the margin is 0.90 / 50.40 = 1.8%. At a 25% discount the price is €47.25, which is €2.25 below cost price. Each table sold brings a loss of €2.25.
The discount limit is easy to calculate in advance. The minimum price equals cost price divided by (1 - minimum margin). If the shop does not sell at a margin below 15%, the price does not fall below 49.50 / 0.85 = €58.24, and the maximum discount from €63 is (63 - 58.24) / 63 = 7.6%.
What discount can a manager give a dealer?
A discount is calculated on price, so it eats margin faster than it seems. Take the current table: cost price €49.50, price €69.30 (40% markup, 28.6% margin).
| Discount | Price, EUR | Profit, EUR | Margin |
|---|---|---|---|
| 0% | 69.30 | 19.80 | 28.6% |
| 5% | 65.84 | 16.34 | 24.8% |
| 10% | 62.37 | 12.87 | 20.6% |
| 15% | 58.91 | 9.41 | 16.0% |
| 20% | 55.44 | 5.94 | 10.7% |
| 25% | 51.98 | 2.48 | 4.8% |
| 28.6% | 49.50 | 0 | 0% |
A discount equal to the margin wipes out the profit: 69.30 × (1 - 0.2857) = €49.50. Anything above 28.6% produces a loss. The manager needs a table with a maximum discount for each product group. The real maximum discount lies below 28.6%, because the margin also has to cover indirect costs.
The prices in the example are before VAT. Whether VAT is included in cost price depends on the accounting setting, so compare price and cost price on one basis, either both with VAT or both without.
How do you update a price list after cost price changes?
The order is as follows. First the economist compares the new cost price with the old one for each product group. Then decides how much of the increase the price covers. Finally the price list is changed with a start date from which the new prices apply.
In the table example materials rose by 10%, and to keep a 40% markup, prices go up by 10% too. For the table that is 63 × 1.10 = €69.30, and for a €100 product it is €110. If the market will not bear such a rise, calculate in advance which margin you are ready to lose. At a price of €66.25 the table’s margin is (66.25 - 49.50) / 66.25 = 25.3%, and at €63 only 21.4%.
If you raise prices on only part of the range, compare cost price with prices in one report so as not to leave items in the price list with a loss-making margin.
How do you avoid selling below cost price?
The rule “not below the threshold” has to be fixed in the system, because a manager forgets it in a conversation with a dealer. Three things are needed.
- Current cost price. It is taken from the specification and purchase prices and updated after new receipts. A change in input prices and its effect on earlier sales is covered in the article on cost price recalculation.
- Minimum price. For each product group calculate the price at the minimum margin, as in the example above, and put it in the price list for managers.
- Control in the document. The system blocks an order in which the price is lower than cost price.
Without the third step, the first two depend on people’s discipline. The owner sees the threshold breach only in the monthly report, when the loss has already happened.
What Bimp does and does not do
Bimp has a control of shipment below cost price, which appeared in release 120. In “Company”, “Accounting settings” (the “Accounting” block) there is a switch. When it is on, the “Amount” cell in a customer order is highlighted in red if the price is below cost price, and saving or posting is blocked with the message “Saving is not possible: the document has products with a price below cost price”. More on the setting is in the article Accounting settings.
Price lists in Bimp are created in the “Customer price lists” directory, and prices are entered manually with a start date. You can change the prices of a product group in bulk with a rule +X, +X%, *X or /X, and after goods arrive you can update prices straight from the document with a rule such as +50%. Old prices are kept in the history next to the new ones. How to create a price list and set its currency is described in the article Price lists. The cost price and margin of what has already been sold are visible in the Gross profit report.
The limits are these. Bimp does not calculate a selling price from cost price automatically: you choose the markup or margin percentage yourself and enter the price in the price list or apply a rule to prices. The control compares price with cost price in the customer order, so it is only as accurate as the cost price, and it does not replace a minimum price based on a target margin. This check stops only a sale at a price below cost price, and a sale at a 2% margin passes it.
To see how a product’s cost price is built from materials, labour and overheads, visit the Bimp site.
FAQ
How do you calculate a product price from cost price?
If you know the desired markup, multiply cost price by (1 + markup). If you know the desired margin, divide cost price by (1 - margin). For a cost price of €45 and a margin of 35%, the price is 45 / 0.65 = €69.23.
How does markup differ from margin?
Markup is profit divided by cost price, and margin is profit divided by price. For a profit of €18 on a product with a cost price of €45, the markup is 40% and the margin is 28.6%. That is why margin is always lower than markup.
What markup do you need for a 30% margin?
Markup = margin / (1 - margin). For a 30% margin that is 0.30 / 0.70 = 42.9%. For a 50% margin you need a 100% markup.
Can Bimp prohibit sales below cost price?
Yes. In "Company", "Accounting settings" there is a switch for control of shipment below cost price. When it is on, saving or posting a customer order is blocked if the document has products with a price below cost price.
In a Bimp ERP demo, a specialist shows how cost price from a specification feeds into the price, how to change a price list by a chosen percentage and how the control against sales below cost price works.
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