Thirty Per Cent Profit, or Twenty-Three: It Depends What You Divide By

What the buy price left out

The 100 in this calculation is what the item cost to acquire, and it is almost never everything spent to have it ready to sell. Inbound freight, customs, the payment fee on the purchase, packaging and the listing cost all belong in the denominator. Add twelve of those to a 100 item and the profit falls from 30 to 18, which is a 16.07 % return on the 112 actually committed — barely half the headline figure. The percentage did not shrink because the sale went badly; it shrank because the true cost was finally counted.

A percentage cannot rank two opportunities

Thirty per cent on an item costing 100 earns 30; five per cent on an item costing 10,000 earns 500. The second is more than sixteen times the money and looks worse on every percentage-based ranking, which is why a business that sorts its catalogue by margin percentage tends to promote small, fiddly lines and starve the ones paying the rent. The percentage answers how efficiently capital was used and the absolute figure answers how much was made; deciding what to stock needs both, plus the third number nobody puts in a spreadsheet — how long the money is tied up before it comes back.

Frequently asked questions

Which convention should I use with a supplier or a buyer?

Say the words rather than the number. "Thirty per cent on cost" and "twenty-three per cent margin" are both unambiguous and both take three extra syllables; "thirty per cent" alone is the source of the whole problem. Trades that buy and resell tend to speak in mark-up on cost, while accounts and investors speak in margin on sales, so the same person can meet both conventions in one afternoon. When a contract fixes a percentage, insist that the sentence names the base — the difference is real money and it is settled by a preposition.

How do I convert between the two?

Margin equals mark-up divided by one plus mark-up, and mark-up equals margin divided by one minus margin. Here 0.30 ÷ 1.30 = 23.08 % and 0.2308 ÷ 0.7692 = 30 %, closing the loop. Three values are worth committing to memory because they come up constantly: a 50 % mark-up is a 33.3 % margin, a 100 % mark-up is a 50 % margin, and a 50 % margin needs a 100 % mark-up. Anyone who knows those three will notice immediately when a quoted pair cannot both be true.