Small Business Pricing Math: Margin, Markup, Fees, Discounts and Sales Tax
A practical walkthrough of the calculations that sit between your cost, advertised price, payment fee, tax, and actual proceeds.
A selling price can look profitable until fees, discounts, and taxes enter the picture. The easiest way to avoid confusing the numbers is to treat each layer separately: cost, markup or target margin, discounts, processing fees, and sales tax.
Start with cost
Decide which costs belong in the calculation. For a product this might include purchase cost, freight, packaging, and direct labour. For a service it might include labour time, subcontractors, software used specifically for delivery, or another direct cost base.
Markup and margin answer different questions
Markup compares profit with cost. Margin compares profit with revenue. If an item costs $60 and sells for $100, the markup is 66.67% while the margin is 40%.
Discounts reduce the selling price before you evaluate the final result
A 20% discount on a $100 price produces $80 revenue before tax and fees. If the original economics only worked at $100, repeated discounting can reduce margin much faster than expected.
Processing fees reduce the amount you keep
A provider charging a percentage plus a fixed amount will take a different effective percentage on a $10 payment than on a $1,000 payment. Use realistic transaction sizes when pricing low-value products.
Sales tax is not normally revenue
For a tax-registered business, sales tax collected from the customer may be money held for remittance rather than business income. Keep the selling price, tax collected, and net business revenue conceptually separate.
A worked example
Suppose an item costs $50 and sells for $100. The gross margin before other expenses is 50%. A 10% discount lowers the selling price to $90. If payment processing costs 2.9% + $0.30, the fee on $90 is about $2.91, leaving $87.09 before considering other expenses. The direct profit over the $50 cost is now $37.09 rather than $50.
Use the right tool for each layer
- Profit Margin Calculator for cost vs revenue.
- Markup Calculator for a price based on cost.
- Discount Calculator for promotions.
- Payment Fee Calculator for processing costs.
- Canadian Sales Tax Calculator for general Canadian tax estimates.
The important habit is to avoid using one percentage as if it described the entire business. Each percentage has a different denominator and a different purpose.