Two stores sell the same type of product, apply the same 40% markup to cost, and arrive at similar prices. An outside observer might conclude that they approach pricing in the same way. In practice, one may have chosen that figure based on competitors’ prices and what customers are willing to pay, while the other simply copied last year’s spreadsheet, updated the cost, and kept the same percentage.
The formula used to calculate a price says very little about the criteria behind it. Two companies can arrive at the same number in completely different ways, but only one of them is actually making a decision.
This distinction—between the calculation shown in the spreadsheet and the information that actually drove the decision—is the most useful starting point for anyone who wants to stop pricing on autopilot.
The formula is the form. The rationale is the essence
Nearly every Brazilian company calculates prices using some variation of “cost plus margin.” On its own, that says nothing about how the price was determined. The formula is just the mechanism—the form. What matters is the substance: the information used to set that margin or markup percentage.
A margin may be set because someone measured how much customers value the product and translated that into a number. It may be there because competitors charge a similar price and the company does not want to stand out. Or, lacking any other criteria, someone may have decided that “35% will do the job” and applied that figure across the board.
The first three situations are valid: the margin connects cost to real information, whether about customer value or the market. The last one is the problem—not because the formula is wrong, but because there is no rationale behind it.
Who Sets the Price: the Company or the Market
Before discussing pricing criteria, it is worth asking a more fundamental question: is your company free to set its own price, or does it have to accept the prevailing market price?
- If the product is similar to competitors’ offerings and customers switch suppliers over a small price difference, the company is a price taker. Charging above the market price drives customers away; charging below it not only erodes margins but also tends to drag everyone into a price war that no one wins.
- If the product has a differentiator that customers recognize and value—service, delivery time, expertise, or brand—the company has more room to set its own price, meaning it can decide how much to charge without being tied to its closest competitor.
This classification changes what a business can reasonably expect from pricing. A price taker cannot charge for value the market does not see in its offering. And a price maker should not copy a competitor’s price when its offering is not comparable.
A common mistake is to treat both situations as if they were the same: applying a fixed markup without first asking which one applies to the company.
The easiest symptom to spot: the same margin on everything
If there is one clear sign that pricing is based solely on cost, it is this: the same margin, or the same markup, applied to every product and every customer, with no distinction.
When the margin varies—higher for products with less direct competition, lower for those that compete on price, and adjusted for customers who buy in volume—it connects cost to other relevant information. When the margin is always the same, it connects nothing: it is simply added on.
This does not mean that using the same margin across the board is always a serious mistake. In businesses with very similar, fast-moving products, a standard markup may be an acceptable simplification. The problem arises when that uniformity results from never stopping to consider whether the margin should vary—when a single margin is a habit, not a choice.
The insights that may lie behind the number
There are three possible sources of information for deciding how much to charge, and most real-world prices use a combination of them:
- Cost — how much it cost to produce or deliver, plus the margin needed to sustain the business.
- Competition — what the market already charges for something comparable.
- Value — how much the customer is willing to pay for the problem the product solves.
The “cost plus margin” formula can reflect any of the three, depending on how the margin was defined. That is why two companies using the same formula may, in practice, be doing opposite things: one may use the margin to account for perceived value, while the other uses it simply because it does not know any other way.
A Numerical Example
A store sells two products with very different costs: product A costs R$120, while product B costs R$40. The store's policy is to apply a fixed 40% markup on cost to every product, without exception.
- Product A: price = 120 × (1 + 0.40) = R$ 168.00
- Product B: price = 40 × (1 + 0.40) = R$ 56.00
Both prices come out “right” according to the formula. But Product A has little direct competition, and customers recognize its value—the store could maintain a higher margin without losing sales. Product B, on the other hand, is sold by several competitors for less than R$ 50. With a 40% markup, the store is priced above the market and is likely losing sales to lower-priced competitors.
If the store treats the two cases separately and adjusts the markup to reflect this difference—60% for product A and 15% for product B—the numbers change:
- Product A: price = 120 × (1 + 0.60) = R$ 192.00
- Product B: price = 40 × (1 + 0.15) = R$ 46.00
Product A now captures more of the value that was already being provided for free. Product B remains competitive where competition is the deciding factor. In both cases, the formula is still cost-plus markup—what changed was the rationale behind the percentage, not the calculation.
How to Use This Distinction
Before adjusting any price, it helps to separate two problems that are often treated as one: “my formula is wrong” and “my criteria are wrong.” Most of the time, the formula works just fine—whether it uses markup on cost or margin on price—as long as it is applied consistently. What is often missing is a product-by-product decision on whether that percentage is there out of habit or because it reflects something real about competition and value.
This requires looking at products individually, not at the store average. A well-structured profit margin spreadsheet can already help reveal where margins are uniform for no good reason. The next step is to ask, for each product group, whether the company is taking or setting that price—and only then decide whether the current percentage makes sense or is simply the result of inertia.
