How to calculate selling price from a target margin
Use the correct target-margin formula and understand why simply adding the margin percentage to cost does not work.
When you have a cost and a target gross margin, the selling price must leave the desired proportion of the final price as gross profit.
Use the margin formula
Selling price equals cost divided by one minus the target margin rate. For a cost of 80 and target margin of 40%, divide 80 by 0.60 to get 133.33.
The gross profit is 53.33, which is 40% of the selling price.
Do not confuse margin with markup
Adding 40% to an 80 cost produces 112, but the resulting margin is only 28.57%.
That may be perfectly acceptable if you intended a 40% markup; it is not a 40% margin.
Validate the cost base
Include the costs your pricing policy is designed to recover. Missing payment fees, fulfillment or direct labor can make the calculated margin misleading.
Review actual gross profit against your assumptions after sales occur.
This guide provides general educational information and is not legal, accounting, tax or financial advice. Requirements vary by country, industry and transaction. See how Docuivo tests its tools and calculations.