The formulas
- Gross profit = selling price − cost
- Markup = gross profit ÷ cost × 100
- Gross margin = gross profit ÷ selling price × 100
- Multiplier = selling price ÷ cost
- Selling price for a target margin = cost ÷ (1 − target margin)
The IRS uses the same logic on a business tax return: gross profit is what remains of net receipts once the cost of goods sold is subtracted, and it is figured before any operating expense is deducted.
Why margin tells you more than markup
Gross margin reads straight off your revenue: at a 40% margin, every $100 of sales leaves $40 to pay for rent, salaries and software, and to make a profit. That is the number to compare with your fixed costs. Markup is handy for pricing from a supplier invoice and for comparing products with each other, but it always looks bigger: a 40% margin and a 66.7% markup describe the same sale.
The classic pricing mistake comes from mixing the two. A store owner who wants a 40% margin and adds 40% to the cost ends up with a 28.6% margin. If the target is a margin, divide the cost by (1 − margin); if it is a markup, multiply the cost by (1 + markup).
These figures are still a gross margin: they leave out outbound shipping, payment and marketplace fees, and overhead. For a price that holds up, add per-unit costs such as packaging and fees to the cost before running the numbers.
Frequently asked questions
What is the difference between margin and markup?
Both start from the same gross profit (selling price minus cost) but divide it by a different number. Markup divides the profit by the cost, gross margin divides it by the selling price. A product bought for $60 and sold for $100 leaves $40 of profit: that is a 66.7% markup and a 40% gross margin.
How do I calculate a selling price from a target margin?
Selling price = cost ÷ (1 − target margin). To reach a 40% gross margin on a product that costs $60, the price is $60 ÷ 0.60 = $100. Adding 40% to the cost would give $84, which is only a 28.6% margin.
How do I convert markup to margin?
Margin = markup ÷ (1 + markup), and markup = margin ÷ (1 − margin). A 50% markup equals a 33.3% margin, and a 50% margin requires a 100% markup, which is a multiplier of 2.
Should margin include sales tax?
No. Sales tax collected from customers is not your revenue: you pass it on to the state. Work with prices before sales tax, and include in the cost everything you pay to get the product, such as shipping in and platform fees.