Retail pricing decisions are made constantly and analysed rarely. Two pieces of arithmetic — the difference between markup and margin, and the volume a discount requires — account for a large share of avoidable margin loss.
Markup and margin are different numbers
This confusion costs real money.
Markup is expressed as a percentage of cost. Margin is expressed as a percentage of selling price.
An item costing $100 sold at $150 carries a 50 percent markup and a 33 percent margin. Same transaction, two different numbers.
A retailer who believes they need a 40 percent margin and applies a 40 percent markup achieves a 28.6 percent margin — a shortfall of more than eleven points, applied to everything they sell.
To convert: margin = markup ÷ (1 + markup). A 100 percent markup is a 50 percent margin. A 50 percent markup is a 33 percent margin.
Set your target as a margin, since that is what pays your overheads, then work backwards to the markup required.
What a discount actually costs
Discounting reduces price without reducing cost, so the entire discount comes out of margin.
Take an item costing $60, selling at $100 — a 40 percent margin. Discount it 20 percent to $80. Cost is unchanged, so margin falls from $40 to $20. The margin has halved from a 20 percent price cut.
To generate the same total margin dollars you must now sell twice as many units. That is the actual proposition when a 20 percent sale is announced.
The general rule: the lower your margin, the more damaging any given discount. A business on 25 percent margin discounting 10 percent needs 67 percent more volume to stand still. A business on 60 percent margin needs only 20 percent more.
Calculate the required volume increase before running a promotion. If it looks implausible, the promotion is a decision to make less money.
When discounting is nevertheless right
- Clearing dead or seasonal stock. Cash recovered funds stock that sells. The loss occurred when the stock stopped moving.
- Genuine customer acquisition, where the first purchase is priced to win a customer who will buy repeatedly. This only works if you actually measure whether they return.
- Using otherwise idle capacity, where the alternative is no sale at all.
- Competitive response on a small number of visible lines, deliberately and temporarily.
What does not work is habitual discounting, which trains customers to wait for a sale and permanently resets what they consider the real price.
Alternatives that protect margin
- Bundle rather than discount, so perceived value rises without the headline price falling.
- Add value — free delivery, extended warranty, a service — which costs less than the equivalent discount.
- Discount a specific line rather than store-wide.
- Offer a lower-specification option at the lower price point rather than discounting the main product.
- Time-limit and volume-limit genuinely, and honestly — false scarcity is a Fair Trading Act problem.
Margin varies across the range, and should
Uniform markup across all stock ignores how customers actually shop. Price-visible lines that customers compare directly warrant sharper pricing; lines where comparison is difficult can carry more.
What matters is the blended margin across the mix, and whether it covers your overheads with something left. Track it, because sales mix shifts silently — a period of strong sales in low-margin lines can lift revenue while reducing profit.
Shrinkage, freight and the costs that eat margin quietly
Your real cost of goods includes inbound freight, and your real margin is reduced by shrinkage, damage, markdowns and merchant fees.
A retailer with a nominal 40 percent margin losing 2 percent to shrinkage and paying 2 percent in merchant fees is operating on materially less than they think. Note that in-store surcharging on most card and EFTPOS payments is now prohibited, so acceptance cost must be built into pricing rather than recovered at the till.
Reviewing prices
Prices set once and left drift out of line as costs move. Review at least annually and whenever a supplier price changes.
Small, regular increases are absorbed better than infrequent large ones. And a supplier cost increase absorbed rather than passed on is a decision to reduce your margin permanently — which is sometimes right and should be deliberate.
business.govt.nz publishes pricing and margin guidance, and the Commerce Commission publishes Fair Trading Act material on pricing representations and was-now claims.
