Profit margin or markup? Working out real profit in a kiryana store

Ask ten shopkeepers what they make on an item and you'll get two kinds of answers. Some mean markup, some mean margin, and the difference adds up over a year.

The two numbers

You buy a packet for Rs 80 and sell it for Rs 100. You make Rs 20.

• Markup is the profit compared with the cost: 20 ÷ 80 = 25%.
• Margin is the profit compared with the selling price: 20 ÷ 100 = 20%.

Same Rs 20, two different percentages. When a dealer says "20% chhoot", or you decide "I keep 20% on everything", be clear which one you mean.

Pricing with a target margin

If you want a 20% margin on an item that costs Rs 80:

Price = cost ÷ (1 − margin) = 80 ÷ 0.8 = Rs 100

Adding 20% to the cost (Rs 96) gives you only about 16.7% margin.

Gross profit is not your profit

Margin on items is gross profit. From it come bijli, kiraya, salaries, the boy's chai, transport, and goods that expire or break. What is left is net profit, the money that is really yours.

A shop that sells Rs 1,500,000 in a month at an average 15% margin makes Rs 225,000 gross. If expenses are Rs 140,000, the real profit is Rs 85,000.

Three habits that help

1. Write every expense, even small ones. Rs 300 a day of small things is Rs 9,000 a month.
2. Use the latest cost price. When the dealer's rate goes up, your margin falls even if your selling price stays the same.
3. Look at profit monthly, not just sales. A busy month can still be a bad one.

Munshi's expense and profit app knows the cost of every item you sell, takes off each expense you write, and shows today's and this month's real munafa.