A 50% mark-up gives you a 33% margin, not a 50% margin. Confusing the two is the most common and most expensive pricing error in South African small business — a business that thinks it is making 40% and is actually making 28% will run out of cash while believing it is profitable.
Get the arithmetic right first. Then decide which of the three pricing methods fits what you sell.
Mark-up vs margin
Mark-up is measured on cost. Margin is measured on selling price.
Worked example. An item costs R100 and you sell it for R150.
Mark-up: R50 profit ÷ R100 cost = 50%
Margin: R50 profit ÷ R150 selling price = 33.3%
Same transaction, two very different numbers.
The conversion table
| Mark-up on cost | Resulting margin |
|---|---|
| 20% | 16.7% |
| 25% | 20.0% |
| 33% | 25.0% |
| 50% | 33.3% |
| 66% | 40.0% |
| 100% | 50.0% |
| 150% | 60.0% |
| 233% | 70.0% |
To get a target margin, use:
Selling price = cost ÷ (1 − margin)
To achieve a 40% margin on a R100 cost: R100 ÷ 0.60 = R166.67.
Note that this is all excluding VAT. Work in VAT-exclusive numbers, then add VAT at the end. Mixing inclusive and exclusive figures is the second most common pricing error.
The three pricing methods
1. Cost-plus
Work out your cost, add a mark-up.
Best for: products with a clear unit cost — retail, manufacturing, distribution.
The trap: most businesses only include direct cost. Your true cost includes freight, duty, clearing, wastage, shrinkage and the share of overheads that unit needs to carry.
Landed cost matters for imports. Purchase price plus freight, insurance, duty and clearing. Using the invoice price alone can overstate your margin by 15 points.
2. Value-based
Price on what the outcome is worth to the customer, not what it costs you.
Best for: services, expertise, anything where the result matters more than the hours.
A bookkeeping service that saves a client R40,000 of penalties and twenty hours a month is not priced by what it costs to deliver.
Requires: understanding the customer's alternative and being able to articulate the value. Harder, and usually far more profitable.
3. Market-based
Price relative to competitors.
Best for: commoditised products where customers compare directly.
The trap: it tells you nothing about whether you can make money at that price. Your cost base is not your competitor's. If the market price does not cover your costs plus a return, the answer is to change your cost base or your offering — not to sell at a loss and make it up on volume.
Most businesses use a blend: cost-plus as a floor, market as a sanity check, value where they can defend it.
Pricing a service by the hour
The most under-priced category in South African small business, because owners cost their time at what they used to earn as an employee.
Work backwards from what the business needs.
Worked example.
| Amount | |
|---|---|
| Target owner earnings | R600,000 |
| Business overheads | R280,000 |
| Total to cover | R880,000 |
Now the hours. A year has 2,080 working hours at 40 a week. But:
| Hours | |
|---|---|
| Total available | 2,080 |
| Less leave and public holidays | (200) |
| Less admin, sales, quoting, invoicing | (500) |
| Less unbilled and written-off time | (180) |
| Actually billable | 1,200 |
Required rate: R880,000 ÷ 1,200 = R733 an hour — before profit and before tax.
The lesson: most service businesses bill around 55% to 60% of available hours, and pricing on 2,080 hours produces a rate roughly 40% too low. That gap is why so many owner-operators work constantly and take home very little.
Check your margin by line, not overall
An overall gross margin of 38% can hide products at 55% and products at 8%.
Calculate margin per product, per service line, or per channel. The results are usually uncomfortable and always useful.
Common findings:
The best-selling line is the least profitable
A delivery or marketplace channel is loss-making after commission — see e-commerce accounting
One large customer is on legacy pricing set years ago
A "loss leader" is leading to nothing
When and how to raise prices
Most small businesses under-price and under-increase. Costs rise every year; prices frequently do not.
A 5% increase on a 30% margin business increases gross profit by roughly 17% — with no extra volume, no extra staff and no extra risk.
How to do it:
Give notice. Thirty days is respectful and reduces resistance.
Increase annually as policy, not occasionally in a crisis. A predictable annual adjustment is far easier to accept than a sudden 20%.
Explain in terms of what they get, not what your costs did.
Start with new customers. Test the new price on people who never knew the old one.
Accept some attrition. If a 6% increase loses 3% of customers on a 35% margin, you are ahead — and usually the customers you lose are the least profitable.
Reprice legacy customers. The client on 2021 pricing is often the least profitable and the most demanding.
Frequently asked questions
What is the difference between mark-up and margin? Mark-up is measured on cost; margin is measured on selling price. An item costing R100 sold at R150 carries a 50% mark-up but a 33.3% margin. Confusing the two is the most common pricing error in small business.
How do I calculate a selling price for a target margin? Divide the cost by one minus the margin. For a 40% margin on a R100 cost, R100 ÷ 0.60 = R166.67. Work in VAT-exclusive figures and add VAT at the end.
How should I price a service? Work backwards from what the business needs — target owner earnings plus overheads — divided by realistically billable hours rather than total available hours. Most service businesses bill only 55% to 60% of available hours, so pricing on total hours produces a rate roughly 40% too low.
How much should I mark up my products? It depends on your industry and cost base, but calculate it from the margin you need rather than a rule of thumb. Include full landed cost for imported goods — purchase price plus freight, insurance, duty and clearing — because using the invoice price alone can overstate margin by 15 points.
When should I increase my prices? Annually, as policy, with notice. A predictable yearly adjustment is far easier for customers to accept than an occasional large one. On a 30% margin business, a 5% price increase raises gross profit by roughly 17% with no additional volume or cost.
Why is my gross margin lower than I calculated? Usually because the cost figure was incomplete — freight, duty, clearing, wastage and shrinkage left out — or because discounting, marketplace commission and returns are reducing the realised price below the list price. Check margin by product and by channel rather than overall.
Know the margin before you set the price
Pricing decisions made without a reliable cost figure are guesses, and the error usually runs in the same direction.
Smartbook produces monthly management accounts with gross margin tracked over time, and works with clients on margin by product line and channel — so pricing decisions start from a number rather than a feeling.
Last reviewed: 26 July 2026. Written by the Smartbook team — SAIPA and SAICA accredited, SARS registered tax practitioners. Worked examples are illustrative. General guidance, not advice on your circumstances.