Markup and margin: choose the right denominator

The same gross margin in euros can give two different percentages. The rate depends on the value you compare it with.

First calculate the gross margin in euros

For a product bought at €60 excluding tax and sold at €100 excluding tax, gross margin is €40. Keep a consistent basis: do not compare a tax-exclusive purchase with a tax-inclusive sale. This difference is a gross margin on the purchase. It does not yet account for all business expenses, such as rent, software, logistics or taxes.

Markup looks at cost

Markup compares the €40 with the €60 purchase cost. It is 40 ÷ 60 × 100, or approximately 66.67%. It answers the question: how much margin is generated for each euro of purchase cost? This rate can exceed 100% when margin exceeds cost, without a mathematical error. You simply need to know what the percentage describes.

Margin percentage looks at sales

Margin percentage compares the same €40 with the €100 selling price. It therefore equals 40%. It describes the share of selling price left after purchase cost. To target a 40% margin with a €60 cost, divide 60 by 1 − 0.40. The resulting price is €100. Multiplying 60 by 1.40 would give €84, which corresponds to a different target.

Move from gross margin to the business budget

To prepare a decision, also list variable costs associated with each sale, then fixed costs for the period. Break-even uses a contribution margin, which is not necessarily just the gross margin on purchases. Calculators do not classify your expenses for you. Clearly record included and excluded items so you compare products or scenarios on the same basis.

Put it into practice

• Gross profit and margins
• Target selling price
• Break-even revenue

Educational text prepared with AI assistance. The examples use adjustable assumptions and are not personal advice.