Margin on selling versus markup on cost — the ₹900 a table nobody notices
Both get called "twenty per cent" in conversation, and they give different answers from the same figures. The arithmetic, why spreadsheets almost always take the wrong one, and how much it costs over a year.
Two people agree the job should make twenty per cent. One divides, one multiplies, and they arrive at different prices. Neither has made a mistake in arithmetic — they have used the same word for two different things, which is the most expensive kind of misunderstanding because it never announces itself.
The two calculations
Take the work table from the pricing walkthrough: cost ₹18,495.
Markup on cost — add twenty per cent to what it cost you:
18,495 × 1.20 = ₹22,194 Profit: ₹3,699, which is 16.7 per cent of the selling price.
Margin on selling — make twenty per cent of what you sell it for:
18,495 ÷ 0.80 = ₹23,119 Profit: ₹4,624, which is 20 per cent of the selling price.
₹925 a table. Both were described as “twenty per cent” by the person who did them.
Which one do you actually mean?
Almost always margin on selling, whether or not that is what your spreadsheet does.
The reason is that every other number in your business is a percentage of turnover. When your accountant says gross margin, they mean profit over sales. When you say “we work on twenty per cent”, you mean twenty paise in every rupee that comes in. That is margin on selling.
But the cell in the spreadsheet says =cost*1.2, because multiplying by 1.2 is the obvious thing to
type and dividing by 0.8 is not. So the intention is margin and the arithmetic is markup, and the
gap goes to the customer, quietly, on every line, for years.
The conversion table
Worth keeping somewhere visible. To achieve a given margin on selling, apply this markup on cost:
| Margin you want | Markup to apply | Divide cost by |
|---|---|---|
| 8% | 8.7% | 0.92 |
| 10% | 11.1% | 0.90 |
| 12% | 13.6% | 0.88 |
| 15% | 17.6% | 0.85 |
| 18% | 22.0% | 0.82 |
| 20% | 25.0% | 0.80 |
| 25% | 33.3% | 0.75 |
| 30% | 42.9% | 0.70 |
| 40% | 66.7% | 0.60 |
The gap widens fast. At 8 per cent the error is under a percentage point and arguably ignorable. At 30 per cent you are leaving 13 points on the table.
What it costs
A shop doing ₹2 crore a year at an intended 20 per cent margin, calculating it as markup on cost instead:
Intended gross profit: ₹40,00,000 Actual, at 16.7 per cent: ₹33,40,000 Difference: ₹6,60,000 a year
That is somebody’s salary, or a machine, gone into a rounding convention. And it does not show up as a loss anywhere — every job was profitable, every quotation was accepted, the year just came in lower than it felt like it should have.
The other place this bites: discounts
A customer asks for ten per cent off. On the markup version:
₹22,194 less 10 per cent = ₹19,975 Cost was ₹18,495, so profit is ₹1,480 — 7.4 per cent margin.
A ten per cent discount removed more than half the profit. It does that because the discount comes off the selling price while the cost stays exactly where it was.
The rule that follows is worth internalising: at a 20 per cent margin, a 10 per cent discount costs you half your profit. At a 15 per cent margin it costs you two thirds. Discounting is far more expensive than it feels, and the feeling is the problem — ten per cent sounds like a small concession.
If you are going to discount, know what margin you are landing on before you say yes. And if discounting is routine in your market, build the room into the price rather than pretending the list price is real.
Different customers, different margins
Most shops charge different types of customer differently — a direct retail customer, a hotel group, a contractor buying in volume. That is sound commercially, and it is also where the confusion multiplies, because now there are three numbers to get wrong instead of one.
The fix is structural rather than a matter of care. Attach the margin to the customer type rather than to the estimator, so that a contractor job is quoted at the contractor margin whoever builds it and whatever day it is. And define once, in one place, whether that number is margin or markup.
Three things to do this week
Check what your spreadsheet actually does. Find the cell. If it multiplies by 1.2, you are doing markup. Decide whether that was intended.
Say which one you mean, in writing. “20 per cent margin on selling” is unambiguous. “20 per cent” is not, and everyone who joins your business will guess.
Put the discount rule where it will be seen. At a 20 per cent margin, 10 per cent off halves the profit. People discount less when they know that, and the knowing has to be at the moment of the conversation rather than in a review afterwards.
None of this is difficult. It is a division instead of a multiplication. It is just that the wrong one is easier to type, and nobody ever gets a complaint about it.