What is the difference between gross margin and markup?

What is the difference between gross margin and markup?

Firstly let's start with what is Gross Margin (also called Gross Profit)

It is:

Sales - Cost of Goods Sold (or direct costs) = Gross Profit

So let's say that a client pays you £100 a month, and you have to get a new user licence for software, for each new client that comes on board, and that costs £20 a month (that is your direct cost) then the gross profit (or gross margin) is £80 per month.

And the gross profit ratio (or gross margin ratio) is that number expressed as a percentage - so in this example it's:

£80 / £100 = 80%

The markup is the difference between the cost and selling price - so in the example above the cost is £20 per month and has a markup of £80 equaling a selling price of £100.   The markup is then often expressed as a percentage of cost so...

In our example...the £80 markup divided by the cost of £20 results in a markup percentage of 400%

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