Small Business

Mysteries of Markups and Margins


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

A: 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! Have a question about running your business? Ask our small-business experts. Send us an e-mail at smartanswers@businessweek.com, or write to Smart Answers, BW Online, 46th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.


The Good Business Issue
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus