Gross margin and price markup are two of the most important metrics for measuring your profit in retail. Your gross margin refers to your business’s net revenue minus the cost of goods sold. Whereas your price markup is the difference between the selling cost and wholesale or production cost of your merchandise.
Our calculators will help you quickly and easily measure both your price markup and gross margin so that you can see if you are on the right track or if you need to make adjustments for success. Simply input the price that you sell your merchandise for and the cost that you paid for it, and your gross margin and price markup will appear automatically.
Gross Margin & Price Markup Calculator
Although both take into account the same metrics (cost and price) to help you understand your profit and costs, gross margin and price markup are not interchangeable. Let’s take a look at what they mean, how they are calculated, and the ways that you can use them to run a successful retail business.
Gross Margin Calculator
Calculating Gross Margin
Gross margin refers to the selling price of an item minus all the costs associated with that item—known as cost of goods sold (COGS). This includes all labor, transportation, storage, marketing, and unit costs. In other words, gross margin is your revenue minus all the money you have spent on acquiring and managing your inventory.
Gross Margin Formula
For a better understanding of the math behind your gross margin, refer to the following formula:
Gross margin = (Price – Cost) / Price
Price refers to the sale price of an item, and cost refers to the COGS. For example, let’s say you bought pots for $30 each plus $10 in transportation and labor costs. You then sell the pots for $80 apiece. The gross margin formula would be:
Gross margin = ($80 – $40) / $80
Gross margin = 0.5 or 50%
In this case, the gross margin for your pots is 50%, so you are making 50 cents of profit on every dollar of pots sold.
As you can see from the example above, gross margin is typically written as a percentage and represents the amount of money you make in profit on every dollar.
Price – Cost is also equal to your Profit, so this formula can also be expressed slightly differently:
Gross Margin = Profit / Price
Price Markup Calculator
Calculating Price Markup
Price markup refers to the difference between the selling price and the direct or wholesale costs of a product/products and is a way of expressing the profit made compared to the direct cost. You can also think of price markup as describing a ratio of the cost compared to the profit.
Price Markup Formula
You can use a simple formula to calculate price markup:
Price Markup = (Price – Cost) / Cost
Again, since Price – Cost is also the Profit, another way you can express profit markup is:
Price Markup = Profit / Cost
Returning to the same example, you bought pots for $40 and are selling them at $80 apiece. In this example, you have a 100% price markup.
Price Markup = ($80 – $40) / $40
Price Markup = $40 / $40
Price Markup = 1 or 100%
As with gross margin, price markup is typically expressed as a percentage.
How to Use Gross Margin and Price Markup
Understanding and tracking your business’s gross margin and price markup is essential for running a profitable business. Through the use of industry benchmarks, you can stay competitive in your unique market. Additionally, you can use price markup and gross margin insights to ensure that your business isn’t overspending and is yielding a profit.
Gross Margin Best Uses
You can certainly use gross margin to look at individual products and how much profit they are going to create for your business. You can also, however, use gross margin to help you understand larger trends in your business and stay on top of your finances.
- Quarterly or Annual Profit Reports: You can look at your gross margin for the quarter or the year to understand your overall profit and revenue. For example, let’s say your overall gross margin for the quarter is 50%. Because all the COGS have been accounted for, you know that the 50 cents per dollar of remaining revenue can go toward other business expenses.
- Company Efficiency: Keeping an eye on your gross margin will alert you to efficiency issues within your company before your margins are so low that you are no longer able to cover costs. For example, if your gross margin drops significantly from the year before, you will need to reevaluate your costs and revenue to determine the issue.
Tip: The best way to adjust your gross margin is to either decrease your wholesale and production costs or increase your price. Beware though: You don’t want to sacrifice quality or drive people away with your prices.
Price Markup Best Uses
Deciding your price markup and keeping track of it will help ensure your business remains financially strong and competitive. As the name may have already made clear, price markup is typically used to help guide your pricing so your business can be profitable and competitive.
Monitor your price markup to:
- Determine Selling Prices: Using industry benchmarks and your own sales goals, you can use price markup to set prices that are competitive and in line with your business goals. For example, say you want to earn a 20% profit on everything you sell. You can use the price markup formula or calculators to set your prices to reflect that goal.
- Meet Profit Goals: Using a strategic price markup, you can determine how much you need to sell your products for to offset any production or wholesale costs while also meeting profit goals.
Industry Benchmarks
There is a wide array of standard or ideal gross margins and price markups across industries. Using these benchmarks as a guide, you can compare your business’s gross margin and price markup with others in your field to determine how you stack up against the competition and evaluate whether you need to make changes.
Tip: Industry standards are not static; they change constantly with the market. Be sure you are checking your industry’s benchmarks regularly to ensure that you are maximizing profit and staying competitive.
Different industries have different benchmarks for gross margin.
Use industry benchmarks for your price markup to ensure your pricing strategy is both competitive and profitable.
Bottom Line
Price markup and gross margin are two of the best metrics to track when it comes to monitoring your revenue and ensuring your business is staying profitable. Using the calculator or formulas above, you can track gross margin to see how efficiently your business is performing and measure your profit on every dollar. And, you can also keep track of your price markup to ensure you are staying competitive and maximizing your profits. Utilize these metrics to ensure that your business is healthy and fruitful.
