A costly misunderstanding.
Maintaining your Gross Profit margin is one of the most critical drivers of business success.
Pricing (the primary determinate of GP margin) is probably the most important lever for a business owner to drive business performance, grow profit and build value.
Yet so many business owners make the same simple arithmetical error that can cost them millions of dollars over a lifetime. We see this constantly.
They confuse GP Margin with Mark Up.
To be clear, GP margin is the difference between sales revenue and the cost of those sales (often expressed as a percentage). Mark Up is the price increase over cost (also calculated using a percentage).
Simple example…
To set the price for individual goods or services, a business owner marks up the cost of items. To end up with a 25% GP margin, what does the owner need to mark up the goods by? By the margin of 25%. An item that costs $1 then sells for $1.25. Correct?
Not correct.
In fact, that item that sells for $1.25 that has a cost of $1 makes just 20% GP margin. The gross profit is divided by the selling price, not the cost price. Confused? Keep reading.
And for a business?
If sales revenue is $10m and the cost of goods is $7.5m, the gross profit is $2.5m and the GP margin is 25%.
But, if the $7,500,000 of cost of goods is marked up by 25% ($7.5m x 125%), the selling price is only $9,375,000. Not $10m.
This result will see the GP margin short of expectations by $650,000. And that could completely wipe out the net profit for the year… or worse.
How do you fix this problem?
Mark up is not the same as GP margin. A simple arithmetic trick that can cost a lot of money if you are not watching for it.
Simply follow this chart…
| Mark Up | = | Margin |
|---|---|---|
| 10.0% | 9.1% | |
| 15.0% | 13.0% | |
| 20.0% | 16.7% | |
| 25.0% | 20.0% | |
| 30.0% | 23.1% | |
| 35.0% | 25.9% | |
| 40.0% | 28.6% | |
| 45.0% | 31.0% | |
| 50.0% | 33.3% | |
| 55.0% | 35.5% | |
| 60.0% | 37.5% | |
| 65.0% | 39.4% | |
| 70.0% | 41.2% | |
| 75.0% | 42.9% | |
| 80.0% | 44.4% | |
| 85.0% | 45.9% | |
| 90.0% | 47.4% | |
| 95.0% | 48.7% | |
| 100.0% | 50.0% |
At the end of the chart, the most extreme situation arises. A 100% Mark Up gives only a 50% GP Margin.
Or if you are mathematically inclined, to get the mark up to target a specific margin, use the formula:
Using the last line of the chart… that would mean:
Ahh… numbers!
Still in doubt? Shout me a coffee and we can talk about margins!
It reminds me of the trick question I loved to ask adults when I was a 14-year-old cheeky kid… ‘what is a half divided by a half’?
Most adults would not hesitate and answer ¼.
Of course, the answer is 1. Had I asked, ‘what is ½ multiplied by ½’, the answer would have been ¼.
Chris Alp
March 2026