Do Retail Stores Operate Off of Mark-Up or Margin?
Gross margin or gross profit is defined as sales minus cost of goods sold. If a retailer sells a product for $10 which had a cost of $8, the gross profit or gross margin is $2. The gross profit ratio or the gross margin ratio expresses the gross profit or gross margin amount as a percentage of sales. In our example the gross margin ratio is 20% ($2 divided by $10).
Markup is used several ways. Some retailers use markup to mean the difference between a product’s cost and its selling price. In our example, the product had a cost of $8 and it had a markup of $2 resulting in a selling price of $10. The $2 markup is the same as the $2 gross profit. However, the markup percentage is often expressed as a percentage of cost. In our example the $2 markup is divided by the cost of $8 resulting in a markup of 25%. (Some retailers may use the term markup to mean the increase in the original selling. For example, if the $10 selling price was increased to $11 because of high demand and limited supply, they would say the markup was $1.)