SimplePOSGross profit, margin and markup explained with simple examples
A clear explanation of gross profit, margin and markup, with worked examples showing how to set prices, convert between them and see the cost of discounts.
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Margin and markup are two of the most confused words in retail. Both describe the gap between what you pay for a product and what you sell it for, but they measure it from different starting points. Mixing them up can lead to prices that are lower than you intended and profits that never appear. This guide explains each term with simple numbers.
Gross profit
Gross profit is the money left from a sale after paying for the product itself. It does not yet include rent, wages, electricity or other running costs.
Gross profit = selling price − cost price.
If you buy a lamp for 60 and sell it for 100, your gross profit is 40. All the examples below use prices without any sales tax, because tax collected is not your money.
Markup: profit compared with cost
Markup tells you how much you added on top of the cost, as a percentage of the cost.
Markup = gross profit ÷ cost price × 100.
For the lamp: 40 ÷ 60 × 100 = 66.7%. You added two-thirds of the cost on top.
Markup is handy when setting prices from supplier costs. If you want a 50% markup on an item that costs 60, multiply the cost by 1.5: 60 × 1.5 = 90.
Margin: profit compared with price
Margin tells you how much of the selling price is profit, as a percentage of the price.
Margin = gross profit ÷ selling price × 100.
For the lamp: 40 ÷ 100 × 100 = 40%. Out of every 100 a customer pays, 40 is gross profit.
Margin is more useful for running the business, because your sales reports and running costs are measured against sales. If your monthly sales are 20,000 at an average margin of 40%, your gross profit is 8,000. That 8,000 must cover all your running costs before you make any net profit.
Why the difference matters
The same lamp has a 66.7% markup and a 40% margin. Both are correct; they just measure different things. The danger comes when you confuse them.
Suppose you decide you need a 40% margin on an item costing 60, but you apply a 40% markup instead. You would price it at 60 × 1.4 = 84. Your gross profit would be 24, and your real margin would be 24 ÷ 84 = 28.6%, far short of the 40% you planned.
To set a price that gives a target margin, divide the cost by one minus the margin:
Selling price = cost ÷ (1 − target margin).
For a 40% margin on a cost of 60: 60 ÷ (1 − 0.40) = 60 ÷ 0.60 = 100. Check: profit 40, and 40 ÷ 100 = 40%.
Converting between margin and markup
You can switch between the two with these formulas, using decimals:
- Margin = markup ÷ (1 + markup). A 25% markup gives 0.25 ÷ 1.25 = 20% margin.
- Markup = margin ÷ (1 − margin). A 20% margin gives 0.20 ÷ 0.80 = 25% markup.
- A 50% markup gives 0.50 ÷ 1.50 = 33.3% margin.
- A 100% markup, doubling the cost, gives 1 ÷ 2 = 50% margin.
What a discount really costs
Discounts come straight out of gross profit, so they hurt more than they seem. Take the lamp again: cost 60, price 100, gross profit 40.
- Offer a 10% discount and the price becomes 90.
- Gross profit falls from 40 to 30, a drop of 25%, not 10%.
- If you sold 100 lamps before, you earned 4,000 gross profit.
- At 30 profit each, you need 4,000 ÷ 30 = 133.3, so 134 lamps to earn the same.
- You must sell 34% more lamps just to stand still.
This does not mean discounts are always wrong. Clearing old stock or attracting new customers can be worth it. But you should know the true cost before you decide.
Point-of-sale software that stores cost prices can show margin and gross profit for every product and every sale, so you can spot low-margin items without doing the arithmetic yourself.