What is margin? (and how to work it out for one product)

Margin tells you what fraction of the price a customer pays is yours to keep, after the cost of the product. It is the number to look at when someone says, "I make good profit on this." Good compared to what? Margin gives you the answer in a single percentage.

One product, step by step

Your cotton kurta sells for Rs 500. It costs you Rs 300 to make and pack.

1. Profit per piece: 500 minus 300 equals Rs 200.
2. Margin: profit divided by selling price. 200 divided by 500 equals 0.4, which is 40 percent.

So of every Rs 500 a customer pays, Rs 200 is profit and Rs 300 covers cost. That 40 percent is your margin.

Margin is not markup

Markup is the same profit measured against cost, not against the selling price. For the same kurta:

• Markup: 200 divided by 300 equals about 66.7 percent.
• Margin: 200 divided by 500 equals 40 percent.

Same product, same Rs 200, two different percentages. This trips people up all the time. If a supplier says "I add 40 percent," do you know whether they mean markup or margin? The prices are very different. Add 40 percent markup to Rs 300 and you get Rs 420, which is a margin of only about 28.6 percent. If you wanted a 40 percent margin, you needed Rs 500.

For a longer treatment, see markup vs margin difference explained and why adding 30 percent to cost undershoots margin.

What to include in cost

The Rs 300 above should contain everything that goes into the product itself:

• Materials or the price you bought it for.
• Your own labour, if you are not just paying yourself from leftovers.
• Packaging, tags and the thank-you card.

Leave out the things that depend on the order, such as courier charges and payment fees, for a moment. Those belong in a fuller calculation. Contribution margin per order, a worked example takes it further.

Does a margin number mean "good"?

I will not give you an ideal percentage. It depends on your volumes, your ad spend, how many orders get returned and how many hours you work. A 40 percent margin on a product that comes back often can be worse than 30 percent on one that never does. Margin is a starting point, not a verdict.

A quick way to check any product

Write four lines on a sticky note:

• Selling price
• Cost
• Profit (price minus cost)
• Margin (profit divided by price)

Do this for your five best sellers. You will probably find one whose margin is lower than you thought.

Where Varchas fits

You enter your own price on each product in the admin. The store does not decide your margin for you, so the arithmetic above is yours to do. Work it out first, then set the price. If your target margin is fixed, the price-from-target-margin formula gives you the selling price directly.

Next step

Pick one product and compute its margin right now. If the result surprises you, you have just found your most useful hour of the week.