The formula
Gross profit is your sales minus your cost of sales. Gross profit margin is that gross profit as a share of sales. Use figures without GST.
| A year | Amount |
|---|---|
| Sales | $400,000 |
| Less cost of sales | $150,000 |
| Gross profit | $250,000 |
| Gross profit margin | $250,000 ÷ $400,000 × 100 = 62.5% |
So 62.5 cents of every sales dollar is left to pay wages, rent and everything else, before any profit. Gross margin is simply 100% minus your cost of sales percentage.
Margin is not markup
Markup is gross profit as a share of cost; margin is gross profit as a share of the price. The same sale gives two very different numbers: the example above is a 62.5% margin but a 166.7% markup. Price with a markup when you meant a margin and you’ll earn less than you planned.
| Gross margin | Same thing as a markup of |
|---|---|
| 20% | 25% |
| 25% | 33.3% |
| 30% | 42.9% |
| 40% | 66.7% |
| 50% | 100% |
| 60% | 150% |
| 70% | 233.3% |
Pricing for the margin you want
Divide the cost by one minus the margin you want. An item that costs you $8 needs a price of $8 ÷ (1 − 0.65) = $22.86 before GST to earn a 65% margin, or $25.14 with GST added.
Margin and markup calculator
Enter sales and cost of sales to see your gross profit, margin and markup.
Enter a cost and the margin you want to see the price to charge.
Works out in your browser. Nothing you type is sent anywhere.
What’s a normal gross margin?
It depends entirely on the industry. The ATO publishes cost of sales ranges, and the gross margin is the other side of them: a coffee shop turning over $250,000 to $600,000 has a cost of sales range of 35% to 41%, which is a gross margin of 59% to 65%. Look up your industry on the benchmarks page.
When your margin falls
A falling gross margin usually means costs rose and prices didn’t follow, discounts crept in, more stock was wasted, or you sold more of your lower-margin lines. Check it every month: a few points lost on gross margin can cost more than a big jump in any single expense.