A product costs $60 and sells for $100. Its gross margin is 40%, but its markup is about 66.7%. These are not competing answers: they divide the same $40 difference by different starting values. Mixing them can quietly undermine a pricing plan.
At a glance
- Gross margin divides gross profit by sales.
- Markup divides the price-cost difference by cost.
- Gross profit is not the amount left after every business expense.
Put the denominator beside the formula
For this teaching example, gross profit equals selling price minus the product’s recognized cost of sales. Gross margin equals that profit divided by selling price. Markup equals the same difference divided by cost. The Australian Government’s pricing guidance describes cost-plus pricing and stresses including relevant costs; the margin and markup calculations below are worked arithmetic examples.
Use consistent cost definitions. A supplier’s product price, landed inventory cost, and fully allocated business cost may differ. State what your calculation includes before comparing it with another business’s reported margin.
A discount changes more than the ticket
At a $100 selling price and $60 cost, gross profit is $40. A 10% price discount lowers the selling price to $90, leaving $30 of gross profit if cost stays the same. Gross profit falls 25%, even though the selling price falls only 10%.
The resulting gross margin is $30 divided by $90, or about 33.3%. The markup is $30 divided by $60, or 50%. This fictional calculation is a useful check before assuming that a modest promotion has a modest effect on unit economics.
Add the costs the first calculation misses
Payment charges, shipping subsidies, returns, advertising, and overhead may sit elsewhere in a business model or its accounting presentation. A 40% product margin does not establish a 40% net margin. Use the company’s actual classification when analyzing its statements.
For a small pricing worksheet, keep separate rows for price, product cost, variable selling costs, and fixed overhead assumptions. Test a discount and a return scenario. A clearly labeled contribution estimate can be useful, but do not present it as a reported accounting margin without a reconciliation.
A practical comparison
| Fictional unit | Before discount | After discount |
|---|---|---|
| Selling price | $100 | $90 |
| Product cost | $60 | $60 |
| Gross profit | $40 | $30 |
| Gross margin | 40% | 33.3% |
| Markup | 66.7% | 50% |
Before using the result
- Write the denominator explicitly.
- Use the same cost definition in comparisons.
- Separate gross margin from net profit and cash.
Continue exploring: our business analysis coverage.
Work backwards from a target margin
For a positive cost C and target gross margin m expressed as a decimal below 1, the required selling price is C divided by (1 minus m). With the fictional $60 cost and a 40% target margin, $60 / 0.60 gives $100. Adding a 40% markup instead gives $84 and a gross margin of about 28.6%—a different target.
This arithmetic assumes the stated cost is the full cost of sales used in the margin calculation. Review the Australian Government’s pricing guidance for broader cost considerations. For the next decision, distinguish allocated and incremental costs, and keep profit and cash flow separate.
Sources and methodology
Reviewed October 17, 2026. WorldLensia explanatory analysis. Worked examples and the accompanying teaching figure are illustrative, not measured findings or product tests. Consult the linked source for definitions and revisions.
To test whether a price or discount covers the relevant costs, see Break-Even Analysis: Test Price, Costs and Capacity Before Trusting the Sales Target and 2/10 Net 30 Payment Terms: Formula, Examples, and Due Dates.