The Difference Between Price Markup and Gross Profit Margin

In retail, there are two ways to measure profit percentages, both methods take into account the cost of the item and its selling price.

The markup (or price markup) is the ratio of the profit to the cost of the item. For example, if a company buys an item for $10 and sells it for $12.50, then the markup is $2.50/$10 = 25%

The gross profit margin is the ratio of the profit to the selling price. Using the same example above, the gross profit margin on the item is $2.50/$12.50 = 20%.

It is easy to compute the gross margin and markup from the cost and selling price, you just need to remember that margin is a ratio over the selling price, and markup is a ratio over the cost. A trickier calculation is to compute the selling price of an item, given its cost and a desired markup or margin. The two calculations are explained below, or you can use the convenient calculator on the left.

Compute Selling Price from Cost and Markup

If the cost of the item is C and the markup percentage is P%, then the selling price of the item is give by the equation

Selling Price = C(1 + P/100)

For example, if the cost is $10 and the retailer desires a markup of 25%, then the selling price must be

$10(1 + 25/100) = $10(1+0.25) = $10(1.25) = $12.50.

Compute Selling Price from Cost and Gross Margin

If the cost of the item is C and the margin percentage is G%, then the selling price of the item is give by the equation

Selling Price = C/(1 - G/100)

For example, if the cost is $10 and the retailer desires a profit margin of 20%, then the selling price must be

$10(1 - 20/100) = $10/(1-0.2) = $10/(0.8) = $12.50.

Relation Between Markup and Gross Margin

If the markup and margin are expressed as decimals, for example 0.17 instead of 17%, then the equations below give the relation between markup and margin:

Markup = Margin/(1 - Margin)
Margin = Markup/(1 + Markup)

© Had2Know 2010