Pricing and pay

Four recurring calculations underpin most pricing and compensation decisions: what to charge, what a discount really costs, what your time is worth, and whether marketing spend pays for itself. Each has a standard way of being got wrong, and each error has the same direction — it flatters the numbers.

Margin, markup, and the gap between them

Margin divides profit by selling price. Markup divides profit by cost. An item costing $50 sold for $100 has a 50 percent margin and a 100 percent markup — same transaction, two different numbers.

Treating them as interchangeable systematically underprices. Adding 30 percent to a $50 cost gives $65, and $15 of profit on a $65 sale is a 23 percent margin, not 30. Achieving a true 30 percent margin requires $71.43. Across a catalogue that gap is the difference between covering overhead and not.

The conversions worth memorising: 25 percent margin is a 33 percent markup, 33 percent margin is a 50 percent markup, 50 percent margin is 100 percent markup, and 60 percent margin is 150 percent markup. Margin approaches but never reaches 100 percent; markup has no ceiling.

The margin figure is also only as good as the cost figure behind it. Landed cost should include inbound freight and duty, card processing at 2.5 to 3 percent, packaging and fulfilment, and expected returns and shrinkage. A 5 percent return rate on non-resalable goods is a 5 percent cost increase across the line, and leaving it out overstates margin on every unit.

Discounts come out of profit, not revenue

Because margin is measured against price, a percentage discount removes a much larger percentage of gross profit. The relationship is not intuitive and it is worth working out before running any promotion.

At a 40 percent margin, an item costing $60 sells for $100 and returns $40 of gross profit. Take 20 percent off and the price is $80, the profit is $20 — half the gross profit for a fifth off the price. Holding total profit flat requires selling twice the units.

The lower the margin, the worse it gets. At a 25 percent margin the same 20 percent discount removes 80 percent of gross profit. At a 20 percent margin it removes all of it. This is how a blanket percentage-off promotion on low-margin categories produces record revenue and no earnings.

Stacked discounts compound rather than add: 30 percent off followed by 20 percent off is 0.70 times 0.80, a 44 percent total reduction rather than 50. Reversing a discount also requires division, not subtraction — divide the sale price by 0.70 to recover the original from 30 percent off. Subtracting the percentage gives a number that is close enough to look right and wrong enough not to reconcile.

What an hour is worth

Salaried and hourly compensation are not directly comparable, and neither converts cleanly to a freelance rate.

A salary divided by 2,080 hours gives a nominal hourly figure, and the shortcut of halving the salary in thousands works at 40 hours a week. It collapses beyond that: $60,000 is $28.85 an hour at 40 hours, $23.08 at 50, and $19.23 at 60. Running the calculation with real hours rather than contracted ones is the most informative thing you can do with a job offer.

Employer-paid benefits add 25 to 40 percent that never appears in the salary figure — health insurance premiums, retirement matching, the employer half of payroll taxes, paid leave, and disability coverage. This is why a lower salary with strong benefits can beat a higher one without.

A freelance rate has to replace all of it and then some. Starting from $28.85, add self-employment tax at 15.3 percent, individual-rate health insurance, unfunded retirement, unpaid leave and slow periods, business insurance and accounting — and then account for utilisation. A 40-hour week contains 20 to 26 billable hours once proposals, invoicing, bookkeeping, and marketing are counted. Working through it, the equivalent contract rate for a $60,000 salary lands around $60 to $75 an hour, roughly double the naive figure.

That utilisation point is the one most often missed and the most consequential. A $100,000 revenue target across 30 billable hours a week needs about $77 an hour; across 20 hours it needs about $115. Set the rate from 40 hours and you have committed to a 60-hour week.

Whether marketing pays for itself

Return on ad spend is attributed revenue divided by spend, and the break-even point is one divided by your gross margin. At a 20 percent margin that is 5.0; at 40 percent it is 2.5; at 70 percent it is about 1.43.

This is why the frequently repeated 4x benchmark is close to meaningless. A 4x return is strongly profitable for a software business and loses money for a low-margin retailer. Any ROAS target quoted without a margin cannot be evaluated.

The reported figure is also only as good as the attribution behind it, and attribution has become materially weaker. Cookie restrictions, mobile tracking opt-outs, and cross-device journeys mean a substantial share of conversions cannot be tied to an impression, and platforms have filled the gap with modelled estimates. Each platform models independently and each is incentivised to claim credit, which is why platform-reported revenue routinely exceeds actual revenue.

The workable response is to use platform figures for optimisation within a channel and judge overall performance on a blended number: total revenue over total marketing spend, from your own accounts. Blended figures cannot tell you which channel to cut, but they cannot be double-counted either. Only incrementality testing — geographic holdouts, spend pauses — establishes what advertising actually caused.

Gross margin is not profit

Every calculation above deals in gross margin, which covers only cost of goods. Rent, salaries, software, insurance, and marketing all come out of what remains, and net margin is typically a fraction of gross.

The typical territory is instructive: grocery retail runs 25 to 30 percent gross and 1 to 3 percent net. Restaurants run 60 to 70 percent gross on food and 3 to 6 percent net. Software runs 70 to 90 percent gross with net varying enormously by growth stage.

The practical use of those figures is as a check on pricing rather than a target. If your category needs a 45 percent gross margin to carry its overhead structure, pricing to 30 percent is a decision to lose money at volume — and the top line will look excellent while it happens.

Frequently asked questions

Calculators referenced in this guide