Margin Coefficient: Definition, Calculation, and Formula
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Does your coefficient take price sensitivity into account?
Let's plan an exchangeDiscover our pricing optimization softwareThe markup factor, or multiplier, is the number by which the pre-tax purchase cost of a product is multiplied to obtain its selling price: selling price (excluding tax) ÷ purchase cost (excluding tax). A markup factor of 1.6 means that the product is sold for 1.6 times its purchase cost.
The Essentials in 6 Questions
The ratio of sales price to purchase cost (excluding tax), expressed without units.
Buyers, pricing teams, department managers, independent retailers.
When setting a selling price, for each new supplier rate.
By reference, product family, or department.
Quickly convert a purchase cost into a target selling price.
Selling price (excluding tax) ÷ purchase cost (excluding tax), or including tax to account for VAT.
Calculate Your Margin Ratio Online
Enter a purchase price and a selling price, or use a multiplier to calculate the price: the calculator also provides the equivalent " Gross margin " and " Markup ."
Free Calculator · Margin Coefficient
Formula for the margin coefficient, excluding tax and including tax
There are two coefficients, and confusing them leads to an incorrect interpretation of the margin: the pre-tax coefficient and the post-tax coefficient.
Pre-tax coefficient = pre-tax selling price ÷ pre-tax purchase cost. This is the only metric that measures the distributor's actual margin.
Tax-Inclusive Coefficient = Tax-Inclusive Selling Price ÷ Tax-Exclusive Purchase Cost. It includes VAT and is primarily used to convert a supplier price directly into a retail price.
Example: A product purchased for €10 (excluding tax) and sold for €16 (excluding tax) has a pre-tax multiplier of 1.6. With a 20% VAT rate, the price displayed is €19.20 (including tax), which corresponds to a post-tax multiplier of 1.92.
Coefficient, Gross margin , and Markup : Conversions
The coefficient, the Gross margin and the Markup describe the same difference between cost and price, interpreted in three different ways.
Gross margin = 1 − 1 ÷ pre-tax coefficient. Markup = pre-tax coefficient − 1.
| Pre-Tax Coefficient | Gross margin | markup |
|---|---|---|
| 1,25 | 20.0% | 25.0% |
| 1,33 | 25.0% | 33.3% |
| 1,50 | 33.3% | 50.0% |
| 1,60 | 37.5% | 60.0% |
| 2,00 | 50.0% | 100.0% |
Coefficient 1.33, rounded (4 ÷ 3).
Same coefficient including tax, but different margins depending on the VAT rate
Applying a single tax-inclusive rate to an entire store does not result in the same profit margin everywhere: VAT accounts for a variable portion of it.
With a TTC coefficient of 2, a product subject to 20% VAT has an HT coefficient of 1.67, which represents a Gross margin of 40%.
Applying the same TTC coefficient to a product subject to 5.5% VAT results in an HT coefficient of 1.90 and a Gross margin of 47.3%.
A difference of more than 7 points in the " Gross margin " score, even though the rule appears to be uniform. Using the pre-tax coefficient avoids this bias.
Why a single coefficient per department reduces profit margins
The formula is quick, but it sets the price based solely on cost: it ignores what the customer is willing to pay and what competitors are charging.
For the products that customers compare—the KPIs—a KPI that is too high damages the store's overall price image.
For products that are not very price-sensitive, however, using the same coefficient actually leaves profit on the table.
Our belief: the coefficient is a good starting point, not a pricing policy. The sensitivity of each product is measured by its price elasticity, and it is this elasticity that should determine the coefficient.
The 3 Common Mistakes Involving the Coefficient
There are three common sources of confusion in most price grids based on coefficients.
- Confusing the pre-tax and post-tax coefficients: a post-tax coefficient of 2 does not equal a 50% margin; VAT takes a portion of it.
- Start with the supplier's list price: the coefficient is applied to the purchase cost net of discounts; otherwise, the displayed margin will be incorrect.
- Think of the coefficient as a rate: a coefficient of 1.5 corresponds to a Gross margin of 33.3%, not 50%.
For all margin formulas, see our guide to calculating gross margin.
Frequently Asked Questions
Short answers to the most frequently asked questions about the margin coefficient.
What is the margin coefficient?
The markup factor, or multiplier, is the number by which the pre-tax purchase cost of a product is multiplied to obtain its selling price. It is calculated as follows: selling price (excluding tax) ÷ purchase cost (excluding tax). A product purchased for €10 (excluding tax) and sold for €16 (excluding tax) has a markup factor of 1.6.
How do you calculate a margin coefficient?
Divide the selling price (excluding tax) by the purchase cost (excluding tax). To set a price based on a multiplier, do the reverse: selling price (excluding tax) = purchase cost (excluding tax) × multiplier. With a purchase cost of 12 € (excluding tax) and a multiplier of 1.5, the selling price is 18 € (excluding tax).
What is the difference between the pre-tax coefficient and the post-tax coefficient?
The pre-tax ratio compares the pre-tax selling price to the pre-tax purchase cost; it measures the actual margin. The post-tax ratio compares the post-tax selling price to the pre-tax purchase cost; it includes VAT. At a 20% VAT rate, a pre-tax ratio of 1.6 corresponds to a post-tax ratio of 1.92.
How do you convert from a coefficient to a " Gross margin "?
Gross margin = 1 − 1 ÷ pre-tax coefficient. A coefficient of 1.6 results in a Gross margin of 37.5%; a coefficient of 2 results in 50%. The detailed calculation is in our fact sheet Gross margin.
How do you convert from a coefficient to a " Markup "?
Markup = coefficient (excluding tax) − 1. A coefficient of 1.6 corresponds to a 60% Markup , calculated based on the purchase cost. This is why the Markup is always higher than the Gross margin for the same coefficient.
What multiplier should be applied in the retail sector?
There is no universal markup factor. It depends on the costs to be covered, the brand’s positioning, the product’s price sensitivity, and competitors’ prices. A given department often benefits from adjusting its markup factor product by product rather than applying a single one.
Are the multiplier coefficient and the margin coefficient the same thing?
In business, yes: both terms refer to the ratio of the selling price to the purchase price. In mathematics, the multiplier coefficient has a broader meaning: it measures the change in a value—for example, 1.2 represents a 20% increase.
Key Takeaways
- Pre-tax coefficient = pre-tax selling price ÷ pre-tax purchase cost.
- Gross margin = 1 − 1 ÷ coefficient; Markup = coefficient − 1.
- Think in terms of the pre-tax coefficient, and adjust it based on each product's price sensitivity.
Do you set your prices using a single multiplier?
Prices adjusted product by product, based on price elasticity and competition.
Let's talk about your profit margins →Discover our pricing optimization softwareThese articles can interest you
The margin, the Gross margin , and the Markup do not measure the same thing, and confusing them distorts all the resulting pricing decisions.
Once the formulas are in place, the challenge becomes operational: tracking a margin that fluctuates weekly, item by item, and assigning each category its own target rather than a single rate recalculated once a quarter.
Price elasticity measures the change in volume relative to the change in price: at -1.5, a 1% price increase results in a roughly 1.5% decline in volume. It is measured excluding promotions and stockouts, preferably by store cluster.
The threshold of 1 distinguishes price increases that reduce revenue from those that do not—not those that erode profit margins. With a 25% price- Gross margin, a 10% price increase remains profitable up to an elasticity of approximately -2.9.