Build the assumption in five steps
- Define the unit, period and cost layer the margin will measure.
- List wider operating needs that sit outside that cost layer.
- Generate more than one margin and price scenario.
- Challenge each scenario against value, alternatives, volume and capacity.
- Record the chosen assumption, evidence and review trigger.
scenario price = cost / (1 - target margin)
- cost
- Cost at the explicitly selected layer (currency per unit) — user record or assumption
- target margin
- User-selected retained share of selling price (ratio) — user assumption
Use amounts on the same indirect-tax basis.
Build the target without circular evidence
| Checkpoint | User scenario | Interpretation |
|---|---|---|
| Selected cost scope | 60 currency units per unit | Same cost boundary and indirect-tax basis in every case |
| Wider operating requirement | 4,000 currency units for the period | Amount outside the selected unit-cost layer that the scenario is intended to support |
| Feasible base capacity | 100 units for the period | Implies a provisional retained amount of 40 per unit, before downside testing |
| Provisional price and margin | 100 currency units and 40% | A scenario to challenge, not a recommended percentage or proof of demand |
| Downside checkpoint | 80 units for the period | Only 3,200 is retained at 40 per unit, so revise the price, scope, capacity or requirement rather than hiding the shortfall |
Worked scenario: reconcile margin and markup
| Line | Value |
|---|---|
| Selected cost | 60 currency units |
| Target margin | 40% |
| Calculated price | 100 currency units |
| Gross profit at selected layer | 40 currency units |
| Equivalent markup on cost | 66.67% |
Avoid the common shortcuts
- Do not describe gross margin as net or operating profit. (not complete)
- Do not copy a benchmark without matching its definition and population. (not complete)
- Do not mix markup and margin percentages. (not complete)
- Do not derive the target from a proposed price and reuse it as evidence for that price. (not complete)
- Do not mix tax-inclusive and tax-exclusive prices or costs. (not complete)
- Do not hide omitted overhead or capacity constraints. (not complete)
- Do not treat competitor prices as like-for-like without checking scope and terms. (not complete)
Methodology used
- Target Margin & Pricing methodology — Margin101
Related tools
- Target Margin & Pricing Planner
Set a price for a target gross margin
- Break-even Sales Planner
Find the units and revenue needed to cover costs or reach target profit