Setting prices that keep the margin you think you have

Profit margin is (selling price − landed cost) ÷ selling price. Worked in rupees, with landed cost, discount leakage and margin versus markup.

To calculate profit margin on a product, take the selling price without GST, subtract the landed cost (purchase price plus every cost of getting it onto your shelf), and divide the result by the selling price. A product you sell for ₹500 that costs you ₹350 landed has a margin of ₹150, or 30% of the selling price. The trap is that most shops calculate it on the invoice price and the list price, and the real margin turns out much thinner once freight and discounts are counted.

Last reviewed: November 2026

What is the profit margin formula?

Margin = (selling price − landed cost) ÷ selling price

Two inputs, both easy to get slightly wrong:

Selling price is what the customer actually pays you after discounts, not the price on the tag, and without GST.
Landed cost is what the item cost you to have on the shelf, not just what the supplier's invoice says.

Get both right and you have the margin you are actually earning. Get either wrong and you have the margin you think you are earning, and that is the gap this post is about.

What is landed cost, and why does it matter?

The supplier's rate is only the starting point. Before an item can be sold, you have often paid for:

Inward freight or transport from the supplier to your godown
Loading, unloading and handling charges
Packing, repacking or labelling
Transit insurance
For imported goods, clearance charges and inland transport
Any tax on the purchase that you cannot claim back as input credit

Spread these over the units in the consignment. If a ₹6,000 transport bill brought in 200 units, every unit carries ₹30 of freight, whether or not you wrote it down.

Shops that skip this step often find their best-selling items are the ones losing the most money, because volume multiplies a small per-unit mistake.

How does GST affect the margin calculation?

The principle is simple: work in GST-exclusive figures throughout.

GST charged on your sale is collected for the government, not earned by you. GST paid on a purchase that you can claim as input tax credit is recovered, so it is not your cost either. Leave both out of the margin calculation.

If you quote GST-inclusive prices to customers, which is common for retail shops, first strip out the tax to find the taxable value, and calculate margin on that. Where input credit on a purchase is not available, the tax paid becomes part of landed cost.

This post deliberately does not state any rates. Rates depend on the product and can change, so confirm the applicable rate for your goods on the official GST portal or with your CA. For how taxable value and tax should appear on your bills, see GST invoice format requirements.

What is the difference between margin and markup?

They use the same profit figure but divide it by different things.

Measure	Formula	Divided by
Markup	(Price − cost) ÷ cost	Cost
Margin	(Price − cost) ÷ price	Selling price

On an item costing ₹100 and selling for ₹150, the profit is ₹50. That is a 50% markup but only a 33.3% margin.

The confusion causes real damage. An owner who wants a 30% margin and adds 30% to cost gets a 23.1% margin instead. To hit a target margin, use this instead:

Selling price = landed cost ÷ (1 − target margin)

For a 30% margin on ₹100 cost: ₹100 ÷ 0.70 = ₹142.86.

What is discount leakage?

Discount leakage is the margin you give away between the price you set and the price you actually collect. It rarely shows up as one decision. It accumulates from:

Counter discounts and rounding off at billing
Scheme discounts and free quantities to a party
Cash discounts for early payment
Festival offers that run longer than planned
Free delivery absorbed by the shop

Each one looks small. But a discount comes entirely out of profit, not out of the price as a whole. A 10% discount on an item with a 25% margin removes 40% of your profit on that sale.

Can you work a full example in rupees?

All figures below are illustrative.

A shop buys 200 units of an item from a supplier in another state.

Line	Per unit (₹)
Supplier price, before GST	350.00
Inward freight (₹6,000 ÷ 200 units)	30.00
Loading and unloading (₹1,000 ÷ 200)	5.00
Packing and labelling	5.00
Landed cost	390.00

GST on the purchase is assumed to be fully claimable as input credit, so it is left out.

The margin the owner thinks they have. List price ₹500 before GST, compared with the supplier price of ₹350:

(500 − 350) ÷ 500 = 30%

The margin after landed cost. Same ₹500 price, real cost ₹390:

(500 − 390) ÷ 500 = 22%

The margin after discounts. Over a month, the shop's average realised price after counter discounts and a party scheme comes to ₹465:

(465 − 390) ÷ 465 = 16.1%

Profit per unit has fallen from an assumed ₹150 to an actual ₹75. On 200 units, that is ₹15,000 the owner expected and never received.

Repricing to recover a 30% margin. If the shop keeps the same discount behaviour (about 7% off list on average), the realised price needs to be ₹390 ÷ 0.70 = ₹557.14, which means a list price of roughly ₹599 before GST. If the market will not bear that, the levers are a lower landed cost, tighter discount rules, or accepting a lower margin with your eyes open.

What are the common mistakes?

Using the supplier rate as cost. Freight and handling are part of the item's cost, not a general overhead to be ignored.
Treating markup as margin. Adding 30% to cost does not give you a 30% margin.
Calculating on GST-inclusive prices. This inflates both sides and makes the result meaningless.
Measuring against list price. Margin is earned on what the customer actually paid.
Old cost, new price. When a supplier raises rates, the next purchase costs more, but the shelf price often stays the same for months.
One margin for the whole shop. A blended figure hides the items that lose money. Check margin per item, or at least per category.

When does this simple method not apply?

The per-unit method above works for trading goods: you buy, you store, you sell. It needs extending when:

You manufacture or cook. Your cost is a recipe of raw materials plus wastage and yield loss. For food businesses, see restaurant inventory and food costing.
Purchase prices vary between lots. Your cost depends on which stock you treat as sold first. See FIFO, LIFO and FEFO explained.
You want net profit, not gross margin. Rent, salaries and electricity are not in landed cost. Gross margin has to be large enough to cover them, so knowing the gross figure accurately is the first step.

FAQ

What is the difference between margin and markup? Markup is profit as a share of cost. Margin is profit as a share of the selling price. The same rupee profit gives a bigger markup figure than margin figure. If you set prices by adding a markup but plan your business on margin, you will overestimate what each sale leaves you.

Should I calculate margin on the GST-inclusive or exclusive price? Use the price without GST, on both sides. GST you collect on a sale belongs to the government, and input tax you can claim back is not your cost. If you cannot claim input credit on a purchase, that tax becomes part of your landed cost. Check eligibility with your CA.

What goes into landed cost? Everything you pay to get the goods onto your shelf ready to sell: the supplier price, inward freight, loading and unloading, packing, insurance in transit, and any tax you cannot claim back. For imported goods add clearance and inland transport. Exclude costs that come after the sale, such as delivery to the customer.

How often should I recheck my margins? Recheck whenever a supplier rate, freight charge or discount scheme changes, and do a full review at least every quarter. Margins rarely collapse in one go. They wear away through small cost increases nobody passes on, so a regular check catches the drift before a whole season is sold at the old price.