Two owners can sell the same product for the same price and describe it completely differently. One says “I put 50% on it.” The other says “I make 33% on it.” They’re both right — one is quoting markup, the other margin — and the gap between those two numbers is where a lot of quiet underpricing happens.
This guide gives you the formulas, a conversion table you can stick on the wall, the GST trap that catches New Zealand businesses, and the discount maths that decides whether a sale actually pays.
What’s the difference between markup and margin?
Both measure the same dollars of gross profit (selling price minus cost of the item). They just divide by a different number.
Markup = (price − cost) ÷ cost
Margin = (price − cost) ÷ price
Take a product that costs you $60 and sells for $100, both GST-exclusive:
- Gross profit: $40
- Markup: $40 ÷ $60 = 66.7%
- Margin: $40 ÷ $100 = 40%
Markup always looks bigger, because cost is always a smaller number than price. That’s fine — as long as you know which one you’re using. The trouble starts when an owner sets prices with a markup but plans the business as though it were a margin.
The conversion table
To switch between the two:
Margin = markup ÷ (1 + markup)
Markup = margin ÷ (1 − margin)
| Markup on cost | Equals a margin of |
|---|---|
| 25% | 20% |
| 33.3% | 25% |
| 50% | 33.3% |
| 66.7% | 40% |
| 100% | 50% |
| 150% | 60% |
| 200% | 66.7% |
| 300% | 75% |
Notice the pattern: to get a 50% margin you need to double your cost, not add half again.
How do I price to hit a target margin?
If you know the margin you need, work backwards from cost:
Price (ex GST) = cost (ex GST) ÷ (1 − target margin)
An item costs $40 ex GST and you want a 40% margin:
- $40 ÷ (1 − 0.40) = $40 ÷ 0.60 = $66.67 ex GST
- Add GST: $66.67 × 1.15 = $76.67 including GST
Compare that with the common shortcut of “putting 40% on”. A 40% markup gives $40 × 1.40 = $56 ex GST — a margin of just 28.6%. On every unit, you’d be leaving $10.67 of gross profit behind.
Where does GST fit in?
This is the bit that trips up New Zealand businesses, because shelf prices to consumers are GST-inclusive. The Commerce Commission says prices “must include or be clear about” the 15% GST, so customers mostly see the inclusive figure — and owners start thinking in it too.
If you’re GST-registered
Do every margin calculation on GST-exclusive numbers:
- Start with your cost ex GST (you claim the GST on purchases back).
- Apply your target margin to get the selling price ex GST.
- Add 15% last, for the shelf or the invoice.
Inland Revenue’s charging GST page sets out the two directions: add 15% to a GST-exclusive price, or take out 3/23 of a GST-inclusive one.
The mistake in numbers. Using the example above, an owner who compares the $76.67 shelf price with the $40 cost thinks they’re making ($76.67 − $40) ÷ $76.67 = 47.8%. The real margin is 40%. The missing $10 per unit is GST — it was never theirs. Plan wages, rent and loan repayments around 47.8% and the cash will come up short at every GST return. (Our GST filing periods guide covers setting that money aside.)
If you’re not GST-registered
Below the $60,000 registration threshold you may not be registered. In that case the GST you pay suppliers is a real cost you can’t claim back, so use the GST-inclusive purchase price as your cost — and you don’t charge GST on your sales. If you’re growing towards the threshold, re-run your prices before you register: from the day you do, 3/23 of every inclusive sale goes to IRD. Keep the same shelf price and your margin drops overnight.
Why do discounts hurt so much more than they look?
A discount comes straight out of your gross profit, not out of the price in general. That’s why a “small” discount can need a surprisingly large jump in sales just to stand still.
Extra sales needed to break even = discount ÷ (margin − discount)
Back to the $66.67 item with a 40% margin. Knock 10% off and it sells for $60.00. Gross profit per unit falls from $26.67 to $20.00. To make the same total gross profit, you need $26.67 ÷ $20.00 = 1.33 times as many sales — 33% more units.
| Your margin | 10% discount: extra sales needed | 20% discount: extra sales needed |
|---|---|---|
| 30% | 50% | 200% |
| 40% | 33% | 100% |
| 50% | 25% | 67% |
At a 30% margin, a 20% off sale needs three times the units just to earn the same gross profit — and that’s before the extra stock, staff and freight to handle the volume.
It works the other way, too. A price rise lets you lose some sales and still come out ahead:
Sales you can lose and break even = increase ÷ (margin + increase)
At a 40% margin, a 5% price rise breaks even even if you sell 11.1% fewer units (0.05 ÷ 0.45). Most businesses lose far fewer customers than that from a modest, well-explained increase.
A worked example: a homewares shop
This is an illustrative example, not a real client.
A Wellington homewares retailer buys candles at $24 ex GST. The owner “puts 50% on”:
- Price: $24 × 1.5 = $36 ex GST ($41.40 including GST)
- Gross profit: $12 per candle
- Margin: 33.3%
Across the shop, sales run at $400,000 a year ex GST at roughly that same margin, so gross profit is about $133,000. Overheads — wages, rent, power, software, insurance — come to about 30% of sales, or $120,000. That leaves around $13,000 before tax and before any loan repayments. One bad winter or a rent review, and it’s gone.
The owner had always assumed “50%” meant half of every sale was hers to cover costs. Here’s what pricing for a genuine 50% margin would look like on the same candle:
- Price: $24 ÷ (1 − 0.50) = $48 ex GST ($55.20 including GST)
That’s a big jump, and the market may not accept it on every line. In practice she might move her best-selling, hard-to-compare lines towards a 45–50% margin, keep sharp prices on items customers compare online, and drop slow lines that only made 25%. Even lifting the shop’s overall margin from 33.3% to 38% adds about $18,700 of gross profit on the same $400,000 of sales — more than doubling what’s left after overheads.
What does margin mean for borrowing?
Margin is also the number that tells you how much a loan really costs your business in sales.
Extra sales (ex GST) needed to cover a repayment = repayment ÷ gross margin
If a loan repayment is $1,500 a month:
| Gross margin | Extra monthly sales needed (ex GST) |
|---|---|
| 25% | $6,000 |
| 33.3% | $4,500 |
| 40% | $3,750 |
| 50% | $3,000 |
That’s why lenders care about margin as much as turnover. A business turning over $1m at a thin margin can have less room for a repayment than one turning over $600k at a healthy margin.
Margin also tells you what borrowed stock is worth. Buy $30,000 of stock at cost and sell it at a 40% margin, and it brings in $50,000 ex GST ($30,000 ÷ 0.60) — $20,000 of gross profit. Price it with a 40% markup by mistake and it brings in $42,000, so $8,000 of that profit disappears. If you’re funding stock for a peak season, get the margin right before you place the order. The timing side is covered in our cash conversion cycle guide, and the cash-flow gap calculator shows how much cash the gap really needs.
Know your margin and need funding for stock or a busy season? Send a 60-second enquiry and we’ll talk through the realistic options.
A five-minute margin check
- Export a sales-by-item report from your POS or accounting software for the last 12 months.
- Make sure cost and price are both ex GST (or both GST-inclusive if you’re not registered).
- Work out margin per line: (price − cost) ÷ price.
- Sort by gross profit dollars, not by margin percentage — the top 20 lines usually matter most.
- Flag any line under the margin your overheads need, and decide: reprice, renegotiate the cost, or drop it.
Repeat it every time a supplier changes their price list. A cost increase you absorb “for now” usually stays absorbed.
Turning healthy margins into the funding you need
Getting pricing right is the cheapest money a business will ever find. But even a well-priced business can run short when stock has to be bought months before it sells, a big supplier wants paying upfront, or a growth opportunity won’t wait. That’s where the right facility — stock and inventory funding, a working capital loan or a business line of credit — pays for itself, because every dollar of stock you can buy at a good margin comes back with profit on top.
If that’s where you are, here’s how Loanster works:
- It takes about 60 seconds, and there’s no credit check when you first enquire.
- We don’t send your details to a pile of lenders. No spray-and-pray, and no phone ringing off the hook with strangers.
- A real person looks at your business — your margins, your turnover, what the money’s for — and calls you to talk it through.
- Please fill the form in accurately. Honest numbers on turnover and what you need mean we can match you with the right option first time.