Gross Margin vs Markup: The Difference, the Formulas and Examples
By Quantum Solutions · 2 min read
Short answer: markup is profit divided by cost; gross margin is profit divided by the selling price. The same sale gives a bigger markup number than margin number, which is why mixing them up leads to underpricing.
Key takeaways
- Markup % = (price - cost) / cost x 100.
- Gross margin % = (price - cost) / price x 100.
- Margin is always lower than markup for the same product.
- To price for a target margin, use: price = cost / (1 - margin).
The two formulas
Take a product that costs you $6.00 and sells for $9.00.
- Profit = 9.00 - 6.00 = $3.00
- Markup = 3.00 / 6.00 = 50%
- Gross margin = 3.00 / 9.00 = 33.3%
The sale is identical. Only the denominator changed: cost for markup, price for margin.
Converting between them
| Markup on cost | Gross margin |
|---|---|
| 25% | 20% |
| 50% | 33.3% |
| 100% | 50% |
| 150% | 60% |
If a supplier or a book quotes a "40% markup" and you read it as a 40% margin, you will price too low.
Pricing for a target margin
If you want a 40% gross margin on a product that costs $6:
price = cost / (1 - margin) = 6 / (1 - 0.40) = $10.00
Check it: profit is $4.00 and $4.00 / $10.00 = 40%. Adding 40% to the cost instead ($8.40) would give only a 28.6% margin.
Things that quietly cut your margin
- Discounts. A 10% discount on a 33% margin item takes a large bite of the profit. Always look at margin after discounts.
- Tax-inclusive prices. If your shelf price includes tax, remove the tax before you calculate margin. See sales tax, VAT and GST explained.
- Shrinkage. Damaged, expired or stolen stock is cost with no sale.
- Supplier price rises. If cost goes up and price stays put, margin shrinks without any sale being lost.
Gross profit is not net profit
Gross profit is net sales minus the cost of goods sold. Rent, wages, utilities and other running costs come out after that. A shop can have a healthy gross margin and still lose money if those costs are too high, so look at both.
How DukaanAI helps
DukaanAI records the cost price and the selling price of every product, so each sale carries its own cost. Your dashboard and the profit and loss report show gross profit, margin, expenses and payroll for any date range, by store.
Frequently asked questions
Is a 50% markup the same as a 50% margin?
No. A 50% markup on cost gives a gross margin of about 33.3%. To earn a 50% margin you need a 100% markup.
How do I price a product to get a target margin?
Divide the cost by one minus the margin you want. For a 40% margin on a $6 cost, the price is 6 / (1 - 0.40) = $10.
Should tax be included when I calculate margin?
No. Work out margin on the price before tax, because tax goes to the tax authority and is not your revenue.
Keep reading
- Barcode Scanning for Small Shops: What You Actually Need: Do you need special hardware to scan barcodes in a small shop? A plain guide to scanner types, product barcodes, labels for loose items and setting up scanning at the counter.
- Free POS vs Paid POS: What to Compare Before You Choose: A fair checklist for choosing point of sale software for a small shop: limits, hidden costs, data export, tax support, multi-store, security and room to grow.
- How to Manage Inventory for a Small Retail Shop (Step by Step): A practical six-step way to manage inventory in a small shop: product list, opening count, recording every movement, minimum levels, regular counts and reading the signals.
- How to Pay Shop Staff: Attendance, Salary, Advances and Bonuses: A simple system for small shops to track attendance, pay salaries, handle advances and bonuses, and keep payroll separate from the cash drawer.