Worked example
100% mark-up
A product bought for R100 is sold for R200. The gross profit is R100, but the margin is only 50%.
CostR100.00
Selling PriceR200.00
Gross ProfitR100.00
Gross Profit Margin50.00%
Educational Business Model
Markup versus Gross Profit Margin
This document explains the difference between mark-up on cost and gross profit margin on sales. The two are often confused, but they are not the same calculation and they do not produce the same percentage.
The principle in plain business language
When a product is marked up, the percentage is calculated on the cost. Gross profit margin is calculated on the selling price. This is why a mark-up percentage will always be higher than the resulting gross profit margin.
Cost
Starting point
The cost of sales is the amount paid for the product or service before profit is added.
+
Mark-up
Mark-up is added to cost to arrive at the selling price.
%
Gross profit margin
The margin is the gross profit expressed as a percentage of the selling price.
Do remember: marking up a product by a certain percentage is not the same as the margin often referred to in trading businesses. This distinction is critical when assessing sales, pricing, profitability and business performance.
The formulas
The model uses the following formula logic extracted from the spreadsheet.
Mark-up %
(Sales − Cost of Sales) ÷ Cost of Sales × 100
This calculation shows how much profit has been added in relation to the cost of the goods.
Gross Profit %
(Sales − Cost of Sales) ÷ Sales × 100
This calculation shows what portion of the selling price is gross profit.
Worked examples
These examples show how the same rand profit can produce different percentages depending on whether it is measured against cost or selling price.
Worked example
50% mark-up
A product bought for R100 is sold for R150. The gross profit is R50, which is 33.33% of the selling price.
CostR100.00
Selling PriceR150.00
Gross ProfitR50.00
Gross Profit Margin33.33%
Worked example
30% mark-up
A 30% mark-up produces a 23.08% gross profit margin, not a 30% margin.
CostR100.00
Selling PriceR130.00
Gross ProfitR30.00
Gross Profit Margin23.08%
Mark-up versus Gross Profit Margin table
The table below converts mark-up into gross profit margin. In this model, a mark-up factor of 1.00 equals a 100% mark-up and produces a 50% gross profit margin.
| Mark-up factor used in model | Equivalent mark-up % | Gross profit margin % | Margin indicator |
|---|---|---|---|
| 100.00 | 10,000% | 99.01% | |
| 10.00 | 1,000% | 90.91% | |
| 8.00 | 800% | 88.89% | |
| 6.00 | 600% | 83.33% | |
| 4.00 | 400% | 80.00% | |
| 2.00 | 200% | 66.67% | |
| 1.00 | 100% | 50.00% | |
| 0.95 | 95% | 48.72% | |
| 0.90 | 90% | 47.37% | |
| 0.85 | 85% | 45.95% | |
| 0.80 | 80% | 44.44% | |
| 0.75 | 75% | 42.86% | |
| 0.70 | 70% | 41.18% | |
| 0.65 | 65% | 39.39% | |
| 0.60 | 60% | 37.50% | |
| 0.55 | 55% | 35.48% | |
| 0.50 | 50% | 33.33% | |
| 0.45 | 45% | 31.03% | |
| 0.40 | 40% | 28.57% | |
| 0.35 | 35% | 25.93% | |
| 0.30 | 30% | 23.08% | |
| 0.25 | 25% | 20.00% | |
| 0.20 | 20% | 16.67% | |
| 0.15 | 15% | 13.04% | |
| 0.10 | 10% | 9.09% | |
| 0.05 | 5% | 4.76% |
Key note: a 100% mark-up on the cost of goods results in a gross profit margin of 50% on sales. Mark-up is sometimes loosely referred to as margin, but for proper business analysis the two terms must be kept separate.
Simple mark-up calculator
Enter a cost and a mark-up percentage to calculate the selling price, gross profit and gross profit margin. This is included for educational website use.
Example: enter 100 for a 100% mark-up. The calculator then doubles cost to establish the selling price.
Selling PriceR200.00
Gross ProfitR100.00
Gross Profit Margin50.00%
Formula100 ÷ 200
How to use this in business assessment
This model is useful when reviewing trading businesses, stock-based businesses, restaurants, franchises, retail operations and any business where cost of sales and gross profit are important.
- Use mark-up when you are calculating the selling price from the product cost.
- Use gross profit margin when you are analysing the profit percentage achieved on sales.
- Do not compare a supplier or seller's mark-up directly with the gross profit margin reflected in financial statements.
- Always confirm whether a person is speaking about mark-up on cost or gross profit margin on turnover.
- For valuation purposes, gross profit margin must be read together with operating expenses, EBITDA and net profitability.
Entrust Business Consultants
Business sales, business valuations, investment opportunity presentations and confidential buyer screening.
ConsultantPieter Kruger
Telephone+27 83 379 6909
Emailpieter@entrustbusinessconsultants.co.za
Websitewww.entrustbusinessconsultants.co.za
LocationCape Town 7550
Document TypeEducational Model