What is the difference between gross margin and markup?
Firstly let’s start with what is Gross Margin (also called Gross Profit)
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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I am Annette Ferguson, CEO of Annette & Co. Chartered Accountant, Profit First Professional and creator of the Business Wealth Engine. We’re also SUPER social so don’t forget to follow. Here’s to your success!