0
$\begingroup$

Let's say I want to sell shoes, which cost me 90€ in production, and I want to sell them with 20% profit. Do I calculate my selling price then with 90€ * 1,2 (profit is 20% of costs) or with 90€/0.8 (profit is 20% of selling price)?

So do I calculate the profit from the costs of from my selling price?

Improve this question
$\endgroup$
5
  • 1
    $\begingroup$ Be careful with terminology, "profit" is not precise. If you mean Gross Profit Margin of 20% then it is the latter calculation that is used; the former calculation where if you tack on 20% to costs is called a 20% Markup. $\endgroup$
    – nbbo2
    Commented Jan 27 at 14:46
  • $\begingroup$ investopedia.com/ask/answers/102714/… For Gross Profit Margin it is Revenue (not Cost) that is the base. $\endgroup$
    – nbbo2
    Commented Jan 27 at 14:52
  • $\begingroup$ This doesn't seem to be Quant-related imo. $\endgroup$
    – KaiSqDist
    Commented Jan 27 at 15:06
  • $\begingroup$ Surely not quant-related, but intriguing. Why would 90€/0.8 make any sense? $\endgroup$
    – SuavestArt
    Commented Jan 27 at 16:27
  • $\begingroup$ @SuavestArt 90/0.8 calculated the price when you want to have 20% gross profit margin based on the selling price. 90/0.8 = 112.5 and 20% of 112.5 is 22.5. So you have costs of 90€ (80% of selling price) and 22.5 gross profit (or how you want to call it) and thats 20% of the selling price. $\endgroup$
    – basti394
    Commented Jan 27 at 18:15

1 Answer 1

Reset to default
2
$\begingroup$

You refer to markup pricing and margin-based pricing, which are distinct pricing strategies.

In margin-based pricing, we're concerned about the difference between the product's selling price and its cost.

$\frac{(P_{selling} - P_{cost})}{P_{selling}} = 1 - \frac{P_{cost}}{P_{selling}}= Margin_{percent} $

$ 1 - Margin_{percent} = \frac{P_{cost}}{P_{selling}} $

$P_{selling} = \frac{P_{cost}}{1 - Margin_{percent}}$

Which relates to your second calculation of 'profit'. Your first calculation is the markup, which is a fixed percentage of the cost.

When it is appropriate using each pricing strategy seems to be a business management question, which is briefly discussed here

Improve this answer
$\endgroup$

Not the answer you're looking for? Browse other questions tagged or ask your own question.