Financial
Gross margin vs markup formula: calculate profit % and target selling price
Distinguish Gross Margin ((Price - Cost) / Price) from Markup ((Price - Cost) / Cost), and price products to hit an exact target margin.
Same $40 gross profit—40% margin vs 66.67% markup
On an item that costs $60 to make and sells for $100, gross profit is $40. Gross Margin divides profit by SELLING PRICE ($40 / $100 = 40.0%), whereas Markup divides profit by COST ($40 / $60 = 66.67%).
Confusing the two when setting prices erodes profit: if you want a 40% Gross Margin on $60 cost, multiplying $60 * 1.40 charges $84—which earns only $24 / $84 = 28.57% margin! Divide Cost by (1 - TargetMargin): $60 / (1 - 0.40) = $100.00.
Require positive price and cost for these ratios and a target margin below 1. The target-price relationship holds before currency rounding; rounding can slightly change the achieved margin. Include the intended cost components consistently and account for taxes or fees separately.
| UnitCost (A) | SellPrice (B) | Gross Profit | Gross Margin % | Markup % |
|---|---|---|---|---|
| 60 | 100 | 40 | 0.40 (40.0%) | 0.6667 (66.67%) |
| 60 | 120 | 60 | 0.50 (50.0%) | 1.0000 (100.0%) |
Gross margin, markup, and target-margin price formulas
Target selling price Cost / (1 - TargetMargin) gives (Price - Cost) / Price equal to TargetMargin before rounding, under the stated assumptions.
=ROUND((B2 - A2) / B2, 4)Selling price required to achieve TargetMargin (C2)
At $60 cost and 40% target margin, 60 / (1 - 0.4) = $100; at 50% target margin, 60 / 0.5 = $120.
=ROUND(A2 / (1 - C2), 2)Try the example
Use the original values or change them to test your understanding.