Margin, markup, channels and break-even

What it is

The Selling prices panel in the Costs tab starts from the recipe's per-unit cost and helps you set a price with confidence. To use it well you need four concepts clear in your head: margin, markup, sales channels, and break-even. This page explains each one with the exact figures and formulas AreaCacao applies.

Margin vs markup

This is the most common pricing mistake, and the two are not the same thing:

• Margin — profit measured against the selling price. It's what you keep out of every dollar you charge.
• Markup — profit measured against the cost. It's how much you add on top of cost to reach the price.

A 50% markup sounds the same as a 50% margin, but it isn't: a 50% markup leaves you only a 33% margin. To keep you from mixing them up, the panel shows each channel's Equiv. markup next to its margin.

Margin ↔ markup conversion table

Read the table like this: to keep a 50% margin you have to apply a 100% markup (double the cost). The classic retail keystone (doubling cost) lands exactly on a 50% margin.

Target-margin pricing

The panel doesn't ask you for the price directly: you tell it the target margin you want to keep, and it works out the price. The formula is:

Price = Cost / (1 − margin)

With a €4.00 cost and a 40% target margin: 4 / (1 − 0.40) = €6.67.

The target margin is set with the general Target margin (%) slider, from 0 to 90% (60% by default), and each channel can have its own; if you leave it empty, the general one applies. If you type a Manual price in a channel, that price overrides the target margin. The panel doesn't calculate the real margin that price leaves you: that's what the profitability traffic light is for.

Sales channels

Each channel can carry a different price because its cost structure and middlemen differ. A new recipe starts with a single channel, DTC, at 60%. Add channel adds the next of the three preset channels you don't have yet, with its starting margin; you can edit any channel's name:

• Direct (DTC) (60%) — you sell straight to the end customer. You keep all the margin, but you take on the customer acquisition and fulfillment costs.
• Wholesale (40%) — you sell to a business that resells. Lower price, but volume and recurring orders.
• Retail (55%) — sold in a physical store, your own or a third party's, which absorbs the cost of location and service.

Each channel has its own Target margin (%), Manual price and VAT (%) fields, and its price appears to the right of its name. Below you'll see its Equiv. markup, its Contribution margin/unit, its Break-even and, if it has VAT, the With VAT price. Remove deletes a channel (at least one always remains).

If the recipe is missing a cost, the panel says so ("Complete the costs to calculate suggested prices, margins and break-even. You can save your selling price."), hides those figures and shows only the manual price in each channel, if there is one.

Break-even

Break-even is how many units a month you must sell to cover your fixed costs. The monthly fixed costs are the total of your Fixed business costs. It's calculated like this:

Units = monthly fixed costs / contribution margin per unit

The Contribution margin/unit is what each unit adds toward covering the fixed costs: price − variable cost per unit. The panel shows it next to Break-even as N units/mo; if the contribution margin isn't positive, you'll see a dash.

Healthy food cost

For pastry and chocolate, a healthy ingredient cost (food cost) runs around 25–35% of the selling price. The panel flags it with "Food cost N% — within the healthy range (25-35%)" or "… — outside the healthy 25-35% range".

When to use each concept

Related terms