If you run a small B2B trading business, optimizing how you manage your operations is essential to long-term success. To do so, you need to keep a close eye on your key performance indicators (KPIs). Among the most important financial KPIs are the markup rate and the margin rate.
By tracking these indicators in your management dashboard, you gain better control over your business and ensure its financial health.
But how do you clearly distinguish between these two metrics? How can you avoid confusing them and how do you calculate them correctly?
In this guide, we break down everything you need to know about margins and markup, and show you how to calculate them easily using our dedicated calculator.
Before diving into markup and margin rates, let’s first revisit the concept of margin.
A margin measures a company’s ability to generate profit from a sale. As key indicators of profitability, gross margin and net margin also provide a high-level view of a company’s competitiveness.
The commercial margin is a key indicator for any business looking to analyze product-level profitability. It is defined as the difference between the selling price (excluding tax) and the purchase cost (excluding tax).
This metric highlights the profit generated between purchasing and selling a product, without factoring in taxes. It is particularly useful when you want to measure profitability per product.
Formula:
Commercial margin = Selling price (excl. tax) – Purchase cost (excl. tax)
By integrating this calculation into your management system and using appropriate accounting software, you can not only track but also improve your commercial performance. The commercial margin becomes a benchmark for evaluating how efficiently your business turns purchases into profit.
The gross margin is a critical profitability indicator for any business. It represents the difference between revenue (selling price excl. tax × quantities sold) and the cost of purchasing goods or services.
It reflects the gross profit generated over a given period and is a key metric when assessing financial performance, especially when reviewing revenue or income statements.
Formula:
Gross margin = Revenue – Purchase costs
For small trading businesses that buy and resell products without transformation, the difference between gross margin and commercial margin is often minimal. These two terms are frequently used interchangeably to express gross profitability.
Accurate calculation—supported by management and accounting software—helps businesses better control costs and pricing to maximize profitability.
The net margin represents the profit remaining after all taxes and operating expenses have been deducted. It helps assess how effectively a company manages its expenses.
Unlike gross margin, which is based on revenue, net margin is based on net profit.
Formula:
Net margin = (Net profit / Revenue) × 100
Net margin also plays a role in pricing strategy by helping determine the break-even point. To do this, the margin must be set based on operating expenses, taxes, and the desired selling price to ensure profitability.
The margin coefficient, also called the multiplier coefficient, is a value that gives an indication of the relationship between the selling price and the purchase costs during a sale. It is calculated as follows:
Margin coefficient = selling price excluding tax/purchase costs excluding tax
Especially used in distribution, the objective of the margin coefficient is to determine your selling price excluding tax from the purchase or cost prices in order to maintain your profitability. Less than 1, it tells you that you are selling below your break-even point. To meet your margin target, it must therefore be greater than 1.5 (i.e. a margin rate of 50%).
Depending on the business model:
Always expressed as a percentage, the markup rate represents the share of gross or commercial margin in the selling price (excluding tax).
It can be analyzed by product category, sales channel, platform, company, or industry. Depending on your strategy, you may aim to increase or decrease it. The higher the markup rate, the higher the profit per sale.
Markup rate = (Commercial margin / Selling price excl. tax) × 100
The markup rate helps assess the profitability of a product and guides pricing decisions, since the desired margin is already known.
It also enables more accurate forecasting of business performance. This metric should be monitored over time and compared with industry averages or competitors’ markup rates.
Doing so helps identify market trends, periods of underpricing, or situations where purchase costs are too high—allowing you to adjust selling prices accordingly.
Also expressed as a percentage, the margin rate represents the share of gross or commercial margin relative to the purchase cost (excluding tax).
The higher the margin rate, the more profitable the business. It also provides flexibility to absorb additional expenses. However, an excessively high margin rate may indicate prices that are out of sync with the market, potentially discouraging buyers.
Margin rate = (Commercial margin / Purchase cost excl. tax) × 100
The margin rate is particularly useful when negotiating purchase prices with suppliers, as it directly reflects how costs impact profitability.
In short, markup rate focuses on selling price, while margin rate focuses on cost structure.
All calculations must be done using prices excluding tax.
You are a shoe distributor.
Results:
Tracking markup and margin rates helps businesses refine pricing strategies, control costs, and maximize profitability. A solid understanding of these KPIs makes it easier to identify pricing optimization opportunities and improve financial management.
Modern management and accounting software automates the calculation and monitoring of markup and margin rates, giving businesses real-time insights into profitability. These tools support faster decision-making and more accurate operational management.
The margin rate is a strategic lever in pricing decisions. It helps businesses define prices that cover costs while generating acceptable profit. By adjusting prices to reach a target margin rate, companies can stay competitive while ensuring sustainable profitability.
