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 improve
your understanding of the relationship between gross profit margin and mark
up. You can use the gross profit calculator or the mark up calculator
to increase the understanding of your business and to identify areas in
which you could improve your business performance. When you enter the
data for selling price and cost price the calculator will calculate: Gross
Profit, Gross Profit Margin (Gross Profit %) and Markup %. Note that
Gross Profit and Markup are the same in dollar terms but they vary in
percentage terms.
An important formula developed by Brent Gregory will
enable you easily convert gross profit to mark up. The formula is
below
if Mark up equals 1/n gross profit equals 1(n+1) where
equals any number. For instance if mark up equals 50% (1/2) then gross
profit equals 33.3% (1/3). Another example is if mark up equals 25%
(1/4) then gross profit equals 20% (1/5). Importantly this also works
in reverse ie if gross profit equals 20% (1/5) than markup equals 25%
(1/4).
