Margin is not markup, and the confusion is costing you money
Ask a distributor what margin they make on a line and you will usually get a markup. The two are different, the difference is large, and pricing off the wrong one leaves money on the table every day.
The arithmetic
Markup is measured against what you paid.
markup % = (price − cost) ÷ cost × 100
Margin is measured against what you sold for.
margin % = (price − cost) ÷ price × 100
Buy at ₹100, sell at ₹125. That is a 25 per cent markup and a 20 per cent margin.
| Markup | Margin |
|---|---|
| 10% | 9.1% |
| 20% | 16.7% |
| 25% | 20.0% |
| 33% | 25.0% |
| 50% | 33.3% |
| 100% | 50.0% |
The gap widens as the numbers grow. Someone who thinks they are making 50 per cent on a line is making 33.3, and if they have built an expense budget on 50 they are going to be short.
To hit a target margin, divide rather than multiply.
price = cost ÷ (1 − margin)
For 20 per cent margin on ₹100 of cost: 100 ÷ 0.8 = ₹125. Adding 20 per cent gives ₹120, which is a 16.7 per cent margin, and you have quietly given away a fifth of your intended profit.
Cost means what you paid
The second error is bigger than the first. Every calculation above depends on knowing cost, and most distributors use a number that is not cost.
On a typical hardware or FMCG bill:
| Description | Qty | Rate | Disc% | Amount |
|---|---|---|---|---|
| BIB COCK WITH WALL FLANGE | 22 | 697.50 | 55 | 6,905.25 |
The rate is ₹697.50. You paid ₹313.88 a unit. That gap, and what to do about it, is what your stock actually cost. If your pricing is built off the rate column, everything you sell looks like a loss and you will not know why.
The reverse error is just as common: using the last purchase rate when prices have moved. If you bought at ₹280 in April and ₹340 in August, neither is your cost. Your cost is the weighted average across what you actually hold.
Three things that are not your cost: the printed rate, the MRP, and the price you paid once, a year ago.
The costs that never make it into the price
Landed cost is more than the invoice.
- Freight and cartage, where you pay it
- The discount you give, which is a price reduction and not a cost, but must be in the calculation
- Credit, which is real. Thirty days of credit at 14 per cent annual is about 1.2 per cent of the value. On a 6 per cent margin line, that is a fifth of your profit.
- Returns and breakage, which are a per-line percentage, not an accident
- Expiry write-offs in pharma and food
None of these need a costing system. They need to be a number you apply. If historically 2 per cent of a line comes back, price it as if cost were 2 per cent higher.
Three checks before you quote
1. Is this above my floor? Your floor is cost plus the costs above. Below it you are paying for the privilege of the order. Know the number before the retailer asks.
2. What does this do to blended margin? A low-margin line is fine if it pulls high-margin lines with it, and a disaster if it is most of your volume. Look at the customer's whole basket, not the line.
3. Am I discounting price or giving stock? A 5 per cent price cut costs you 5 per cent of revenue. A 10+1 costs you 9.1 per cent of goods at cost — see free goods and trade schemes for why it is 9.1 and not 10. Which is cheaper depends on your margin, and the answer is often not the obvious one.
Where the money actually leaks
Not in the big negotiations. Those get attention.
It leaks in the lines nobody looks at — a product whose supplier price went up 8 per cent last quarter and whose selling price did not move, because nobody reprices 400 SKUs by hand. Six months later it is sold at a loss on every order and it will stay that way until a year-end review notices.
The fix is a list, not a policy: every product where the current selling price is below cost plus your floor. If that list can be produced in a few seconds, it gets looked at. If it takes an afternoon in a spreadsheet, it gets looked at once.
Where Dhela fits
Dhela costs stock at what you actually paid — the printed amount with the trade discount already in it, spread across billed and free units — and keeps a moving weighted average per product. Selling prices are checked against that cost, so a line that has drifted below its floor shows up as a line rather than as a surprise at year end.
It shows cost per unit next to the printed rate on every purchase, because on a bill with 55 per cent discount those are very different numbers and only one of them is yours.
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