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