Written for owners of independent stores and small chains in the US: convenience and grocery, liquor and smoke shops, fashion, gifts, hardware, and garden and farm stores.
The short version
- Price from your target margin, not markup.Divide cost by one minus that margin. For example, a 50% markup is only a 33.3% margin.
- Work out open-to-buy before you order.Open-to-buy is what you can still order: planned sales at cost plus planned ending inventory, minus beginning inventory and what is already on order.
- Keep a price history for compare-at prices.Advertise a former price only if you offered it in good faith for a reasonably substantial period. Pull any ad your history does not support.
Markup and margin are easy to mix up, and they are not the same number. Sales tax is collected for the state and is never part of your sales or your margin, so leave it out of every calculation here.
Margin and markup
- Margin is (price minus cost) divided by price.
- Markup is (price minus cost) divided by cost.
- For example, a $3.00 item costing $2.00 is a 33.3% margin but a 50% markup.
- To price from a target margin, divide cost by (1 minus the margin).
| Cost | $2 |
| Margin, 35% of the price | $1.08 |
| Price | $3.08 |
| The same item at a 50% markup | $3 |
$2.00 x 1.5 = $3.00, only a 33.3% margin; $2.00 / 0.65 = $3.0769, rounded to $3.08, for 35%
For example, a 50% markup is only a 33.3% margin, so a budget built on the markup overstates every gross margin line.
What a clearance really costs
A markdown is margin you give away. Here is a season of jackets bought at $45 each, for example, with 60 of them cleared.
| 90 jackets at the full $129 | $11,610 |
| 60 jackets at 30% off, $90.30 each | $5,418 |
| Sales | $17,028 |
| Gross margin | $10,278 |
$17,028 minus $6,750 cost (150 x $45) = $10,278, which is 60.4% against the planned 65.1%Markdown dollars: 60 jackets x $38.70 = $2,322.
The sales you need to break even
Your margin also sets how much you must sell to cover the fixed costs. Divide them by the margin, for example:
| Rent and CAM | $48,000 |
| Payroll | $95,000 |
| Other overhead | $27,000 |
| Fixed costs a year | $170,000 |
| Sales needed a year at a 34% margin | $500,000 |
$170,000 / 0.34 = $500,000, about $9,615 a week
Open-to-buy: how much you can still order
Open-to-buy for a month is planned sales at cost, plus planned ending inventory, minus beginning inventory, minus what is already on order. Work it out before you place forward orders.
| Planned sales at cost ($80,000 at a 55% margin) | $36,000 |
| Planned ending inventory at cost | $45,000 |
| Less beginning inventory at cost | -$52,000 |
| Less inventory already on order | -$11,000 |
| Open-to-buy at cost | $18,000 |
Compare-at and former prices
A former price must be one you actually offered in good faith for a reasonably substantial period. In California, you cannot advertise a former price that did not prevail within the 3 months before the ad unless you state its date. As of Oct 2026.
16 CFR 233.1; Cal. Bus. and Prof. Code 17501
In California that ad is misleading under Business and Professions Code 17501.
Most states adopt NIST Handbook 130 for unit pricing and method of sale, and scanner overcharges are a frequent inspection finding. Check shelf tags against the POS after every price change.
Count the high-risk categories monthly: tobacco, vapes, spirits, razors, infant formula and OTC medicine.
Asked in Greymill
Markup is profit over cost: $1.00 / $2.00 = 50%
Margin is profit over price: $1.00 / $3.00 = 33.3%
Price for 35%: $2.00 / (1 minus 0.35) = about $3.08
The bigger problem is your budget. A 50% markup is only a 33.3% margin at full price.
So every gross margin line is overstated, even before markdowns.
The fix: set a target margin for each category. Then price at cost divided by (1 minus that margin).
Shall I reprice your best sellers and rebuild the budget on real margins?
Ask it about your own business
Paste this into Greymill with your own figures, and Cash & Profit works it through for your business.
I run a shop in [state], in the US. Here are my top [20] items with cost, retail price and units sold last [period]: [paste]. Work out the margin on each, flag anything under [target]%, and suggest prices that hit [target]%. Then build a 3-month open-to-buy from planned sales of [$], beginning inventory at cost of [$] and [$] on order.
More for shops and physical retail in the US
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- Signing a store lease without overpaying on CAM and percentage rentNNN, CAM caps and audits, percentage rent breakpoints, co-tenancy and guaranties: the clauses that decide what a store really pays, and what to do when a notice arrives.Read the lesson
- Schedules, teenage stockers and staff who chase shopliftersRetail scheduling laws, the federal limits on 14 and 15-year-olds, commission pay, and why staff must never try to stop a thief.Read the lesson
- A customer says my card fee or gift card is illegalCard surcharges, dual pricing, gift card expiration dates and refund signs: where stores get caught, state by state.Read the lesson
Open the interactive lesson · Every shops and physical retail lesson · What Greymill knows about the trade
Sources
The primary sources behind this lesson, checked Oct 2026.
- FOMC statement; H.15 (Show the MATH, source the MARKET)
- October 28, 2026 statement; FOMC calendar 2026 (federalreserve.gov/monetarypolicy/fomccalendars.htm) (Margin, inventory and markdown MATH)
- Civ. Code 1770(a)(29) (Pricing, fees and labels)
- Minn. Stat. 325D.44 subd. 1(15) (Pricing, fees and labels)
- 16 CFR 464.1 (Pricing, fees and labels)
- 16 CFR 233.1; BPC 17501 (Pricing, fees and labels)
- Handbooks 130, 133 (Pricing, fees and labels)
- PRC 42280 and following as amended (Pricing, fees and labels)