Costs and margin
Split your costs into fixed and variable, work out what each sale really leaves you, and stop mixing up margin and markup.
Two kinds of business cost
Fixed
You pay it whether you sell nothing or a lot: workshop rent, a website subscription, an equipment loan, a part-time helper's wage. It's the bill that arrives even in a dead month.
Variable
It rises with every unit you sell: materials, packaging, shipping, card or platform fees per order. Sell nothing and it's zero; sell twice as much and it roughly doubles.
Check yourself
Samira makes and sells soap. Fixed or variable?
- Monthly rent for her small workshop
- Oils and scents for each batch
- Courier charge on each order
- Yearly fee for her online shop page
- Paper wrapping for each bar
- Instalment on the mixer she bought
Show the answer
Fixed: Monthly rent for her small workshop, Yearly fee for her online shop page, Instalment on the mixer she bought
Variable: Oils and scents for each batch, Courier charge on each order, Paper wrapping for each bar
Margin
What a sale leaves you after its variable costs, as a share of the price. Price − variable cost = profit per unit (sometimes called contribution). Divide that by the price and you have the margin.
Sell for 50, variable cost 30: profit per unit 20, margin 20 ÷ 50 = 40%.
Markup
The same profit per unit, but divided by the cost instead of the price. Because cost is smaller than price, markup is always a bigger percentage than margin for the same sale.
Sell for 50, cost 30: markup 20 ÷ 30 ≈ 66.7%, margin 40%. Same sale, two different percentages.
Price 50
Variable cost per unit 30
Profit per unit 50 - 30 = 20
Margin = 20 / 50 (price) = 40%
Markup = 20 / 30 (cost) = 66.7%
Working back from a target margin:
Price = cost / (1 - margin)
= 30 / (1 - 0.40) = 30 / 0.60 = 50Margin divides by price, markup divides by cost. Same 20, two percentages.The last line is the one to remember: to hit a target margin, divide the cost by (1 − margin). Don't just add the margin % to the cost.
Check yourself
Shirin buys scarves for 40 each and wants a 50% margin on every sale. What should she charge?
- 60
- 80
- 90
- 100
Show the answer
80
Right. 40 ÷ (1 − 0.5) = 80. Profit 40, and 40 ÷ 80 = 50% of the price.
| Markup (on cost) | Margin (on price) |
|---|---|
| 25% | 20% |
| 50% | 33.3% |
| 100% | 50% |
| 200% | 66.7% |
Check yourself
Kaveh sells headphones for 120 that cost him 90. His margin is about 33%.
Show the answer
False
False. Profit per unit is 120 − 90 = 30. Margin divides by the price: 30 ÷ 120 = 25%. The 33% he has in mind is the markup: 30 ÷ 90 ≈ 33.3%.
HIDDEN COSTS
The costs people forget
Beginners count materials and forget the rest of each sale: platform or marketplace commission, card or payment fees, packaging, delivery, returns and breakage, and their own time. Each one is small. Together they can eat half your margin.
Samira's soap: price 50, ingredients 30. Add a 10% platform fee (5) and packaging (3): true variable cost 38, profit per unit 12, margin 12 ÷ 50 = 24%, not 40%.
One month for a small shop
Profit per unit 20
Units sold 80
Total from sales 80 x 20 = 1,600
Fixed costs this month 1,200
------------------------------------
Profit for the month 1,600 - 1,200Profit = 400. At 60 units it would be exactly zero (60 x 20 = 1,200).Every sale first chips away at the month's fixed costs. Only after they are covered does anything count as profit. The next lesson turns this into your break-even point.
Check yourself
Match each term to what it means
Show the answer
- Margin → Profit per unit as a % of the price
- Markup → Profit per unit as a % of the cost
- Fixed cost → The same whether you sell 0 or 100
- Variable cost → Grows with every unit you sell
- Profit per unit → Price minus variable cost
Lesson recap
- Fixed costs arrive whatever you sell; variable costs grow with each unit.
- Profit per unit = price − variable cost. Margin divides it by price; markup divides it by cost.
- To hit a target margin: price = cost ÷ (1 − margin). A 50% markup is only a 33% margin.
- Count every variable cost, including fees, packaging, delivery and returns, before you trust your margin.