You buy a product for SAR 80 and sell it for SAR 100. The difference is SAR 20, but calling it a 25% margin confuses two percentages with different denominators. That distinction changes the price needed for a target margin and the discount a salesperson can grant. We calculate both measures from the same figures, then show how a relatively small discount can remove a large share of gross profit. Examples exclude taxes and operating expenses to keep selling price and product cost directly comparable.
A cost of SAR 80 and price of SAR 100
| Measure | Calculation | Result |
|---|---|---|
| Gross profit per unit | 100 less 80 | SAR 20 |
| Gross profit margin | 20 ÷ 100 × 100 | 20% |
| Markup on cost | 20 ÷ 80 × 100 | 25% |
Adding 25% to SAR 80 produces a SAR 100 price, but profit is only one fifth of that selling price. If a manager asks for a target margin of 25%, multiplying cost by 1.25 will not deliver it. Confirm what “margin” means in the discussion, use the corresponding formula and state the basis explicitly in the pricing policy or worksheet.
Name three different measures
Gross profit is net sales less cost of sales. Gross profit margin divides gross profit by net sales and multiplies by one hundred. Markup divides the same profit by cost, then multiplies by one hundred. Because the denominator changes, the percentages cannot be used interchangeably even though the monetary profit is identical.
All examples use illustrative prices and costs excluding taxes, a constant unit cost and no additional selling expenses or returns. Those assumptions isolate the pricing effect. In practice, agree with your accountant what belongs in cost of sales and consider discounts and channel-related costs before comparing products, stores or branches.
A 10% discount can have a larger profit effect
Return to a price of SAR 100 and cost of SAR 80. A 10% discount reduces the price to SAR 90. Unit gross profit becomes SAR 10 instead of SAR 20. The selling price fell by ten percent, but gross profit per unit fell by fifty percent. The new margin is 10 ÷ 90, approximately 11.11%. The discount percentage alone therefore tells only part of the story.
If the business originally sells one hundred units, gross profit is SAR 2,000. After the discount, it needs two hundred units to achieve the same gross profit, assuming unchanged unit cost and no extra expenses. More delivery work, labour or returns could mean that doubling units still fails to preserve the final result. State those assumptions beside the calculation before approving a campaign.
This comparison concerns gross profit in a simplified example. It does not show that doubling sales is achievable or guaranteed, or that more orders automatically preserve net profit or cash availability.
Calculate a price for a target margin
For a known cost and target margin below 100%, price equals cost divided by one minus the margin expressed as a decimal. At a 25% target margin and SAR 80 cost, the calculation is 80 ÷ 0.75 = SAR 106.666.... Displaying SAR 106.67 follows ordinary two-decimal rounding, subject to the business's rounding policy. Profit is approximately SAR 26.67: around a quarter of the selling price, rather than a quarter of cost.
This is arithmetic, not a recommendation that the resulting price suits the market. A commercial decision also needs customer value, competition, price sensitivity and expected demand. A positive gross margin does not establish net profitability either. Operating expenses and other charges may sit outside the unit cost used in the example. Product pricing and whole-business profitability are related but separate questions.
A pricing and discount review checklist
- State whether the target is a margin on sales or a markup on cost.
- Use an approved, current cost and identify its components.
- Calculate the net selling price after discounts before measuring margin.
- Review the effect on unit profit and expected total gross profit.
- Test the result against higher costs or lower-than-expected volume.
- Compare actual results with the plan after the campaign and record changed assumptions.
Read product results and the sales mix together
Total sales can improve while the overall margin falls because lower-margin items represent a larger share of sales. Review quantities, prices, costs and mix together, comparing suitable periods. ACCA's performance-assessment material emphasises interpreting gross-margin changes in the context of selling prices and cost of sales instead of merely describing an increase or decrease.
Use the price-and-discount scenario during a Wali ERP demonstration to discuss sales and the profitability reports your team needs. A useful review should help you identify the underlying transaction and its assumptions, then assess the workflow required for your business. The purpose is to make a pricing decision explainable and reviewable after the campaign, not simply to display an attractive percentage.
Sources & further reading
Visit the original source to explore the concept and its wider context.
General educational content. Appropriate treatment depends on your business and accounting policies; consult your accounting professional when applying it to business records.
