How Price Affects Gross Margin

How does Price affect Gross Profit/ Gross Margin?

The first step is to understand how a Gross Profit is calculated.

Example

You sell a painting for £100 and you paid £60to produce it, the “cost of goods” is 60%. Gross Margin is 40%. Your gross profit is £40.

Calculation

  • (selling price)- (cost of goods)/ (selling price)

*selling price is also known as revenue

Let’s say you want to reach a specific gross margin and you know the cost

Use this formula

  • (cost of goods)/1-(gross margin %)= selling price

In this example, if you pay £60 for a painting and want 40% gross margin, subtract 40% from 1 to=0.60, so £60/.06=£100 selling price

Here’s an example using the same numbers as above. Let’s say your cost on a product is £100.00 and you want to make a 20% gross margin. Subtract 0.2 from 1 to get .0.8  and £100 / 0.8 = £125.

If you prefer you can use an online calculator

Now we can look at Mark Up (It’s subtly different and people get confused, myself included. so I refer back to these notes.

Markup percentage is the percentage difference between the actual cost and the selling price, while gross margin percentage is the percentage difference between the selling price and the profit.

Calculation

  1. determine your COGS (cost of goods sold). For example  £40
  2. find our your gross profit by subtracting the cost from revenue. We’re selling for £50  so the profit is £10
  3. divide profit by COGS.  £10/£40 =0.25
  4. express it as percentages: 0.35*100= 25%

If it’s easier use the markup calculator 

Margin vs Markup Chart

15% Markup = 13.0% Gross Profit
20% Markup = 16.7% Gross Profit
25% Markup = 20.0% Gross Profit
30% Markup = 23.0% Gross Profit
33.3% Markup = 25.0% Gross Profit
40% Markup = 28.6% Gross Profit
43% Markup = 30.0% Gross Profit
50% Markup = 33.0% Gross Profit
75% Markup = 42.9% Gross Profit
100% Markup = 50.0% Gross Profit

This is handy to know when calculating agency cost for contingent and permanent labour. Make sure when you are doing comparisons to ask the agency if they are using a margin or markup calculation. If you want to buy contingent labour and want to purchase the quick guide click here