Pricing and markup calculator

The price is the most powerful number in your business

A small change in price changes profit far more than the same change in sales or costs, and yet most small businesses set prices by looking at the neighbour's shop or by adding a number that feels right. The result is prices that are either too low to cover the real costs or high enough to lose customers for no good reason. This free calculator takes you through the arithmetic in the right order: the full cost of one unit, the margin you need, the price that delivers it, and what happens when a competitor undercuts you.

Margin and markup are not the same thing

This is the most common pricing mistake. Markup is profit as a share of cost: if something costs KES 100 and you sell it for KES 150, the markup is 50%. Margin is profit as a share of the price: the same sale earns KES 50 on KES 150, a margin of 33%. A markup of 50% is a margin of 33%, and a margin of 50% needs a markup of 100%. Mixing them up leads to prices that are far too low. The calculator works with both, so you can see the same price expressed each way.

• Price from a margin = cost divided by (1 minus the margin).
• Price from a markup = cost multiplied by (1 plus the markup).

What goes into the cost

The cost to buy or make a unit is only the beginning. Add the costs that go with every sale: packaging, delivery, transaction fees and damage or waste. Then decide how much of your overheads, such as rent, salaries and utilities, each unit should carry. A simple way is to divide your monthly overheads by the number of units you expect to sell, and enter that as a percentage of the unit cost. The calculator adds all three to give the full cost per unit.

Using the calculator

1. Enter the cost to buy or make one unit and the direct costs that go with it.
2. Enter the share of overheads each unit should carry.
3. Enter the margin you want and read the price before and after VAT, the profit per unit and the markup it equals.
4. Or enter a markup instead, and read the price and the margin it gives.
5. Enter a competitor's price and the number of units you expect to sell, and compare the profit.

VAT and your price

If you are registered for VAT, the price your customer pays includes VAT at the standard rate, currently 16%, but the VAT is not your income. Set your margin on the price before VAT. The calculator shows both. If you are not registered, which is the case below a turnover of KES 5,000,000 a year unless you register voluntarily, you do not add VAT, and your price is your price. Our VAT calculator will add or remove VAT from any figure, and the invoice and quotation templates in this collection use the same rate.

When a competitor is cheaper

The comparison section shows the profit per unit and the margin if you matched the competitor's price, and your monthly profit at both prices. Sometimes the answer is that you cannot afford to match: the competitor's price is below your full cost, and following them would lose money on every sale. Sometimes it is that you are overpricing. Often the right answer is neither: compete on quality, speed, service or convenience, and hold your price. The table at the bottom shows the price at margins from 10% to 55% so that you can see how much room there is.

Discounts are more expensive than they look

A ten per cent discount on a product with a 35% margin does not cost ten per cent of your profit, it costs almost a third. To earn the same profit you would need to sell about forty per cent more units. Before you discount, put the new price in the calculator and see how many extra sales it must bring to break even. Our break-even and pricing calculator in this collection works out exactly that, from your fixed costs.

This calculator is a planning tool and not financial advice. Real pricing also depends on demand, competition and brand. The VAT rate and threshold on its Rates sheet and in this text come from the KenyaTax rates table and have not yet been verified for the period, so confirm them with the Kenya Revenue Authority.

Related guides, calculators and templates

• Free calculator: VAT Calculator
• Guide: VAT for small businesses in Kenya: when to register and what to charge
• Guide: How to file a VAT return on iTax, step by step
• Guide: How to price your products and services: markup, margin and break-even
• Another template: 12-month cash flow forecast
• Another template: Break-even and pricing calculator
• Another template: Budget versus actual tracker

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