Pricing for margin when costs move: markup, margin and VAT

Two shopkeepers buy the same soap at UGX 2,000 and sell it at UGX 2,500. One says the margin is 25 percent, the other says 20 percent. Both are describing the same sale, and the confusion between markup and margin is one of the most common reasons a shop that looks profitable on the shelf is not profitable in the books. Add VAT and rising costs, and the gap widens.

Markup and margin are not the same number

Markup is profit as a percentage of cost. UGX 500 on a UGX 2,000 cost is a 25 percent markup.

Margin is profit as a percentage of the selling price. UGX 500 on a UGX 2,500 price is a 20 percent margin.

Margin is the figure that matters for the business, because rent, wages and tax are paid out of sales, not out of cost. A useful conversion: to achieve a target margin, divide the cost by (1 minus the margin). For a 30 percent margin on a UGX 2,000 cost, the price is 2,000 ÷ 0.70 = UGX 2,857, which is a 43 percent markup. Shop owners who apply a "30 percent markup" believing it gives them 30 percent margin are consistently under-pricing.

Price VAT-inclusive, but know the net

In Uganda, VAT is charged at 18 percent on the supply of most goods and services, and the annual registration threshold has been UGX 150 million, according to PwC's tax summary for Uganda (last reviewed January 2026). Parliament has passed amendments for the 2026/27 budget that include raising the registration threshold from UGX 150 million to UGX 300 million, effective 1 July 2026 once signed into law, according to KPMG. Check your own position with URA if your turnover is near either figure.

If you are VAT registered, the shelf price customers see includes 18 percent that belongs to URA. Of a UGX 2,950 shelf price, the net selling price is 2,950 ÷ 1.18 = UGX 2,500. Your margin must be calculated on the UGX 2,500, not on the UGX 2,950. Shops that forget this effectively give away a slice of the 18 percent every time they set a price.

Set your target margin on the net price, then add VAT to reach the shelf price, and round to something customers find sensible. Monthly VAT returns are due before the 15th of the following month, so the till must hold the tax rate on every product, not in the cashier's head.

When costs rise, reprice from cost, not from habit

The Uganda Bureau of Statistics reported annual inflation of 4.6 percent for the twelve months to September 2026, up from 4.1 percent in the year to August. Across a shop that figure hides large differences: some supplier prices will not have moved, while others have jumped with the exchange rate or the weather.

The right response is to reprice line by line from the latest cost price, not to add a flat percentage to the whole shelf. Three rules help:

1. Use the replacement cost, not the historical one. If the next carton will cost more than the last, the stock on the shelf is worth the new price, and pricing it off the old invoice gives away margin you will need to restock.
2. Protect your known-value items. Customers remember the price of sugar, bread and airtime. Keep those sharp and recover margin on lines that are less price-sensitive.
3. Change prices on a schedule, say the first Monday of the month, so staff and regulars know when to expect it, rather than drip-feeding increases.

Watch the other direction too

Margin is not only about raising prices. Accounting standards require that inventories are measured at the lower of cost and net realisable value, where net realisable value is the estimated selling price less the costs of making the sale (IAS 2). Stock you can only sell at a discount is already worth less in your books. Marking slow or short-dated lines down early releases cash and shelf space; holding out for full price usually ends in a bigger write-off.

A margin report worth reading weekly

• Gross margin percentage by category, this week against the four-week average.
• The ten products with the lowest margin by value sold: are they loss leaders on purpose?
• Products whose cost price rose this month without a shelf price change.
• Products with negative margin: nearly always a receiving or pricing error.

Pricing is not a one-off decision made when a product is first listed. It is a weekly habit built on an accurate cost price, a clear VAT basis and a margin target measured the right way round.

Sources

1. https://taxsummaries.pwc.com/uganda/corporate/other-taxes
2. https://kpmg.com/us/en/taxnewsflash/news/2026/06/uganda-tax-amendments-2026-2027-budget.html
3. https://www.ubos.org/2026/09/30/consumer-price-index-september-2026/
4. https://www.indexbox.io/blog/uganda-annual-inflation-rises-to-46-percent-in-september-2026/
5. https://www.ifrs.org/issued-standards/list-of-standards/ias-2-inventories/