Mysteries of Markups and Margins

To consumers, cost is the figure printed on the price tag. For manufacturers and retailers, it is a rather different calculation

By Karen E. Klein

Q: Would you kindly explain the difference between the percentage of markup vs. gross profit margin? I found that if the markup is 26%, this does not mean the GP is 26%. In fact, the GP will be lower than 26%. Why? -- D.S., Chicago


You're right in that the two figures are not equal. Traditionally, gross profit margin is figured on the sales price of an item, and the markup is based on cost. Historically, retailers used the markup method to determine the sales price while manufacturers used the gross margin method. However, in today's retail environment, both terms are often used interchangably to mean gross margin, says Paul Ratoff, a Placentia (Calif.)-based small-business consultant.

The markup method involves increasing the price of an item by a certain percentage over cost. For instance, a dress that cost the company $100 wholesale would be offered for retail sale at $126 if the store had a 26% markup on cost (multiply the markup percentage by the cost and then add the result).

The gross profit margin on the sale is figured by subtracting the cost ($100) from the sales price ($126) and then dividing the result ($26) by the sales price ($126). In this case, that produces a margin of 21%. Hope that helps!

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