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Gross Margins and Markups

Setting Prices and Interpreting Results

Commonly, when setting prices, a retailer will add a markup to the price they paid for a stock item. This will usually be a percentage increase. A Fruiterer who buys an apple in bulk for $0.20 may sell them individually with a markup of 50%. 20c marked up by 50% gives the selling price of 30c. Later when looking at the sales data she will commonly calculate a gross margin. This is the percentage of the sales resulting from the markup (10c per apple divided by the 30c selling price gives a gross margin of 33.33%). After the fruiterer has sold all of her apples she can expect that she will be able to keep one third of the money and the remainder will be paid to the wholesaler. Any error is a measure of wastage through bad fruit, theft, gifts, till variance, unsold product etc.

A misguided fruiterer, however, may expect that they can keep 50% of the money in the till - after all that is the markup used. So it is very important to understand the difference between markup percentage and gross margin.

Below is a simple calculator which will allow you to convert one to the other.

To investigate the impact of discounting on profits click here.