<p>The "<strong>margin</strong>" is a <em>portion of the selling price</em>. It is defined as</p>

<p>$$\text {margin} \equiv \frac {P-C}{P}$$</p>

<p>From the above <em>definition</em>, we see that the margin cannot exceed $100\%$.</p>

<p>If one has the cost and he wants to calculate the price in order to have a specific margin, one must calculate</p>

<p>$$P(\text {margin}^*) = \frac {C}{1-\text {margin}^*}$$</p>

<p>The first formula written in the question is wrong, because it uses "margin", but it would become correct if instead one used the concept of "markup".</p>

<p>The "<strong>markup</strong>" is defined as the percentage increase of cost in order to determine the selling price:</p>

<p>$$\text {markup} \equiv \frac {P-C}{C}$$</p>

<p>It is easy to obtain that the relation between them is</p>

<p>$$\text {margin} = \frac {\text {markup}}{1+\text {markup}}$$</p>

CC BY-SA 3.0
2015-06-12T16:29:09.490Z
2015-06-12T16:29:09.490Z
Alecos Papadopoulos
<p>There seems to be two formula to calculate a selling price.</p>

<p>The first formula that I came upon would be</p>

<pre><code>Cost * (1+Margin) = Selling price
Example : 10 * (1+0.25) = 12.5
</code></pre>

<p>However, a lot of people uses the following :</p>

<pre><code>Cost / (1 - Margin) = Selling price
Example : 10 / (1-0.25) = 13.33...
</code></pre>

<p>This gives a very different number.</p>

<p>As far as I know, the margin and selling prices can be anything you want for most products.</p>

<p>Also note that the second formula fails if you have a margin of more dans 100%.</p>

<p>My question is why is the second formula the most popular ? Is it only a gimmick to get a bigger price?</p>

<p>Am I missing something subtle at work here ?</p>

<p>Also, what should I do if the wanted margin is more than 100% ?</p>

<p>Thanks!</p>

<pricing>
What is the correct way to calculate a selling price from margin and a cost?
Joel Gauvreau
# What is the correct way to calculate a selling price from margin and a cost?

(Asked by: username_0 on 2015-06-12)

There seems to be two formula to calculate a selling price.
The first formula that I came upon would be
Cost * (1+Margin) = Selling price
Example : 10 * (1+0.25) = 12.5

However, a lot of people uses the following :
Cost / (1 - Margin) = Selling price
Example : 10 / (1-0.25) = 13.33...

This gives a very different number.
As far as I know, the margin and selling prices can be anything you want for most products.
Also note that the second formula fails if you have a margin of more dans 100%.
My question is why is the second formula the most popular ? Is it only a gimmick to get a bigger price?
Am I missing something subtle at work here ?
Also, what should I do if the wanted margin is more than 100% ?
Thanks!

**Tags:** pricing


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## 1 answers

### Answer by username_1 on 2015-06-12. Score: 1 | Accepted answer

The "**margin**" is a *portion of the selling price*. It is defined as

$$\text {margin} \equiv \frac {P-C}{P}$$

From the above *definition*, we see that the margin cannot exceed $100\%$.

If one has the cost and he wants to calculate the price in order to have a specific margin, one must calculate

$$P(\text {margin}^\*) = \frac {C}{1-\text {margin}^\*}$$

The first formula written in the question is wrong, because it uses "margin", but it would become correct if instead one used the concept of "markup".

The "**markup**" is defined as the percentage increase of cost in order to determine the selling price:

$$\text {markup} \equiv \frac {P-C}{C}$$

It is easy to obtain that the relation between them is

$$\text {margin} = \frac {\text {markup}}{1+\text {markup}}$$


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