Profitability
Calculating your margin without getting it wrong (gross margin, multiplier, rate)
· 6 min read
Many shop owners confuse “margin” and “markup”, and set their prices by gut feeling. Three simple concepts are enough to see things clearly.
Gross margin in euros
Gross margin = selling price excluding VAT − purchase cost excluding VAT. If you buy an item for €4 excl. VAT and sell it for €10 excl. VAT, your gross margin is €6.
Markup rate and margin rate
The markup rate compares the margin to the selling price: 6 / 10 = 60%. The margin rate compares the margin to the purchase cost: 6 / 4 = 150%. These are not the same figures, which is where the confusion comes from.
To compare between businesses, the markup rate is generally used.
The multiplier
The most practical for everyday use: multiplier = selling price excl. VAT / purchase cost excl. VAT. Here, 10 / 4 = 2.5. To set a price, you multiply the purchase cost by your target multiplier, then add VAT.
Example: cost €3.20, multiplier 2.8 → €8.96 excl. VAT → around €10.84 incl. VAT at 21%, often rounded to €10.90.
Don’t forget your costs
Gross margin is not profit. There’s still rent, energy, wages, and shrinkage (theft, breakage, unsold stock) to cover. Aim for a multiplier that covers all of this and still leaves a result.
What a POS system brings
By entering the purchase price of your items, the register calculates the margin on every sale and the average rate per category. You can see immediately which products are driving your results up and which ones aren’t earning anything.