Ask ten shop owners how much they make on a packet of sugar and you will get ten answers, most of them too high. The usual reason is that two different numbers get mixed up: markup, which is worked out on what you paid, and margin, which is worked out on what you sold for. This guide explains both, with examples in kwacha, and shows how to set prices that still leave you money after rent and transport.
Markup and margin are not the same
Both describe the same profit, the difference between what an item cost you and what you sold it for. They divide it by different numbers.
Margin % = profit ÷ selling price × 100
Example
You buy an item for K100 and sell it for K125. The profit is K25.
- Markup: K25 ÷ K100 = 25%
- Margin: K25 ÷ K125 = 20%
Same packet, same K25. If you think "I make 25%" when you really keep 20% of every kwacha that comes in, you will overestimate your profit every month.
The gap grows as the markup grows:
| Markup on cost | Margin on price |
|---|---|
| 10% | 9.1% |
| 20% | 16.7% |
| 25% | 20% |
| 33.3% | 25% |
| 50% | 33.3% |
| 100% | 50% |
Use markup to set a price, because you know your cost. Use margin to check the business, because sales are what come in.
Start from the true cost
The price on the wholesaler's invoice is not what an item cost you. Getting it to your shelf costs money too.
Example: a case of sugar (example figures)
| 20 packets of 2 kg sugar at K58 | K1,160 |
| Your share of transport to the shop | K60 |
| True cost of the case | K1,220 |
|---|---|
| True cost per packet (K1,220 ÷ 20) | K61 |
If you price from K58, every packet's profit is K3 smaller than you think.
Add anything else you pay to get the stock in: bus fare, a bag of ice for drinks, a porter. Damaged or expired stock is a cost too: if one packet in twenty usually gets damaged, spread its cost over the other nineteen.
Setting the price
Once you have the true cost, choose a markup and work out the price. Then round it to a price customers can pay easily.
Example: pricing a K61 packet
| Markup | Price | Rounded | Profit | Margin |
|---|---|---|---|---|
| 10% | K67.10 | K67 | K6 | 9.0% |
| 15% | K70.15 | K70 | K9 | 12.9% |
| 25% | K76.25 | K76 | K15 | 19.7% |
Which one is right depends on the item:
- Everyday basics that customers compare across shops (sugar, mealie meal, cooking oil) carry a small markup. They bring people in and sell fast, so the small profit comes often.
- Convenience and slower items (sweets, biscuits, toiletries, batteries) can carry more. People buy them because you are close, not because you are cheapest.
- Check the shops nearby. If you are far above them on basics, customers notice. If you are far below, ask yourself whether you are covering your costs.
If you want a particular margin instead, work backwards: price = true cost ÷ (1 − margin). For a 20% margin on K61: K61 ÷ 0.8 = K76.25.
Checking you still make money
A good price on each item is not the same as a shop that makes money. Rent, electricity, transport and your own pay come out of the margin. Check it each month.
Example month (example figures)
| Sales for the month | K30,000 |
| Average margin across what you sold | 15% |
| Gross profit (K30,000 × 15%) | K4,500 |
|---|---|
| Rent | −K1,500 |
| Electricity and talktime | −K400 |
| Transport for stock | −K600 |
| Left for you and for growing the shop | K2,000 |
K30,000 of sales sounds like a lot. Only K2,000 of it is yours. Taking more than that from the drawer means spending the money for next month's stock.
Pricing tips for small shops
- Write every price down, on the shelf or a list at the till, so everyone who sells charges the same.
- Price in amounts people can pay, so change is easy: K65 rather than K64.50.
- Watch your best sellers' margins most closely. A small mistake on an item you sell 100 times a week costs far more than a big mistake on one you sell twice.
- Do not compete on price alone. Being open early, having bread when others run out, and knowing your customers' names keep people coming back at a fair price.
- Review prices every month against your costs and the shops around you.
