How to Calculate Discount, VAT and Profit Margin

To calculate a discount, multiply the price by 1 minus the discount rate. To add VAT, multiply the net price by 1 plus the VAT rate. To find profit margin, divide the profit by the selling price. These three steps cover most shop prices and small business pricing. This guide shows the formulas, the common errors and a set of examples you can check.

Discounts

The sale price after a discount is:

Sale price = Original price × (1 − discount rate)

Take a 250 item with 20 percent off. The discount rate is 0.20, so the sale price is 250 × 0.80 = 200. The amount saved is 50.

To find the original price from a sale price, divide by 1 minus the rate. A sale price of 200 after 20 percent off came from 200 ÷ 0.80 = 250.

Stacked discounts

Two discounts applied one after the other do not add up. They multiply. Take a 100 item with 30 percent off, then 20 percent off the new price:

1. 100 × 0.70 = 70 after the first discount.
2. 70 × 0.80 = 56 after the second discount.

The total discount is 44 percent, not 50 percent. Store signs often show the first rate only, so check the final price before you decide.

VAT

VAT is a tax added to the net price. The rate depends on the country and the product, so use the rate that applies to you. The formulas below work for any rate.

Add VAT: Gross price = Net price × (1 + VAT rate)

Remove VAT: Net price = Gross price ÷ (1 + VAT rate)

A net price of 100 with 20 percent VAT gives a gross price of 100 × 1.20 = 120.

A gross price of 120 with 20 percent VAT gives a net price of 120 ÷ 1.20 = 100. The VAT is 120 − 100 = 20.

The common mistake is to take 20 percent off the gross price. That gives 120 × 0.80 = 96, which is wrong. The VAT is part of the 120, so you must divide by 1.20.

Discount and then tax

When a shop applies a discount before tax, calculate the discount first, then add the tax. A 100 item with 20 percent off and 20 percent VAT works like this:

1. 100 × 0.80 = 80 after the discount.
2. 80 × 1.20 = 96 with VAT.

Check your local rules for how tax applies to discounted prices, because the order can differ by country.

Profit margin and markup

These two numbers use the same profit, but they use different bases. This is the source of most pricing mistakes.

• Profit = Selling price − Cost
• Profit margin = Profit ÷ Selling price × 100
• Markup = Profit ÷ Cost × 100

Take a product that costs 60 and sells for 100:

• Profit: 100 − 60 = 40.
• Margin: 40 ÷ 100 = 40 percent.
• Markup: 40 ÷ 60 = 66.7 percent.

The margin is always smaller than the markup when the price is above the cost. A 40 percent margin and a 40 percent markup are different prices.

Price for a target margin

To reach a target margin, divide the cost by 1 minus the margin:

Price = Cost ÷ (1 − target margin)

For a cost of 60 and a 40 percent target margin, the price is 60 ÷ 0.60 = 100.

Price for a target net amount

Marketplaces and payment services take a fee from each sale. To keep a fixed amount after the fee, divide the amount you want by 1 minus the fee rate. If you want to keep 90 after a 10 percent fee, the selling price is 90 ÷ 0.90 = 100.

Examples in one table

Where the app helps

Percent & Finance Calc Pro has a Business group for these calculations. The app includes discounts by percentage or fixed amount, add or remove VAT, split the VAT out of a total, profit margin and markup, and the price for a target margin or net amount. It also has a calculator for discount first, then tax. Business calculations need Pro, and the free version keeps the basic and percentage change tools.

Each result shows the formula with lettered inputs, so you can check how the answer was reached. You can copy or share the result in one tap. For an app page with the full list, see Percent & Finance Calc Pro.

If you are new to percent change, start with how to calculate percentage increase. The same base rule applies to discounts and margins.

To check your own prices, open Percent & Finance Calc Pro. You can see more tools on the apps page.

Frequently asked questions

What is the difference between markup and margin?

Markup uses the cost as the base, and margin uses the selling price as the base. With a cost of 60 and a price of 100, the markup is 66.7 percent and the margin is 40 percent.

Does a 50 percent discount followed by a 50 percent discount make the item free?

No. The first discount leaves half the price. The second discount takes half of that, so the item costs a quarter of the original price. The total discount is 75 percent.

How do I know which VAT rate to use?

VAT rates depend on the country and sometimes on the product. Use the rate that your tax authority or your accountant gives for your sale. The formulas in this guide work for any rate.

Are these calculations tax or accounting advice?

No. They are arithmetic. Tax and accounting rules change and vary by place. Check any figure that matters with your accountant or tax authority before you set a price or file a return.