Margin, markup, profit#

For an online store’s success, understanding and correctly working with terms like margin, markup, and profit is key. These terms are the basic pillars of effective pricing, which decides whether your online store will be profitable. Let’s take a look at what these terms mean and how to work with them.

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What is margin?#

Margin represents a percentage expression of how much an online store earns on the goods it sells. It’s calculated from the sale price of the goods. It’s the difference between the sale price and the acquisition cost (purchase price). Margin shows what share of the total price is profit.

Formula for calculating margin:#

What is markup?#

Markup is the percentage increase of the purchase price that an online store adds in order to achieve the desired profit. Unlike margin, markup is calculated from the purchase price, not from the sale price. We often come across it when deciding what price to set for a product.

Formula for calculating markup:#

What is profit?#

Profit is the absolute value that remains after costs are subtracted from revenue. It’s important to distinguish between gross profit (profit before subtracting operating costs, such as shipping, marketing, and administrative expenses) and net profit (profit after subtracting all costs).

Why is it important to know these terms?#

For an online store owner, it’s key to understand how margin, markup, and profit relate to one another and how they affect the company’s financial health. Incorrect pricing can lead to goods either being sold below cost (and thus at a loss) or, on the contrary, being too expensive, so customers are reluctant to buy them.

What you can do to increase your margin:

1. Dynamic pricing
   This strategy involves continuously adjusting prices based on demand, seasonality, or the competition. For example, during peak season an online store can raise prices thanks to higher demand, while during a less active period it can lower prices to attract customers.

2. Psychological prices
   An online store can set prices so they seem more favorable to the customer. For example, instead of 500 CZK a product can cost 499 CZK, which feels psychologically cheaper even though the price difference is minimal.

3. Bundle offers
   Selling bundles (e.g. 2+1 free) can increase the average order value while also increasing profitability on individual items, without the customer perceiving the price as excessive.

4. Increasing the average order value
   Online stores often use cross-selling or upselling. This means offering the customer a more expensive version of a product, or suggesting accessories that can complement their purchase. This increases the total order value and the margin.

5. Cost optimization
   Tracking purchase prices and negotiating better terms with suppliers can significantly affect margin and profit. If an online store lowers its cost of acquiring goods, it can offer competitive prices without having to sacrifice its profit.

FAQ#

What is the main difference between margin and markup in practice? Margin is calculated from the sale price, markup from the purchase price. The same profit therefore comes out as a different percentage depending on which method you use. For example, a profit of 100 CZK with a purchase price of 400 CZK and a sale price of 500 CZK = a margin of 20 %, a markup of 25 %.

How do I set a minimum margin in Pricing Fox? In the rule editing view, go to the Limits section and choose Restriction by purchase price. Here enter the desired minimum margin or markup in percentages or CZK. Pricing Fox will then never calculate a price that would violate this threshold.

Can I have both a minimum and a maximum margin at once? Yes. In the limit by purchase price you can set both a lower and an upper margin or markup threshold. It comes in handy, for example, for maintaining a price range for a premium assortment.

Why isn’t the margin displayed on the Overview or Products page? To calculate the margin, Pricing Fox needs to know the product’s purchase price. If your feed doesn’t contain the purchase price or it isn’t correctly mapped in the Project settings, the margin won’t be displayed. Check the setting of the element with the purchase price.