Quick answer
Markup divides gross profit by cost; gross margin divides it by sales. Buying something for £12 and selling it for £20 gives £8 gross profit: a 66.7% markup and a 40% gross margin. Those percentages describe the same transaction but cannot be substituted for one another.
Start with numbers on the same basis
Choose a single product and keep tax treatment consistent. Do not compare a tax-inclusive shelf price with a cost figure prepared on a different basis. Ask your bookkeeper to confirm which taxes belong in the calculation for your VAT registration and recovery position, then label the figures clearly.
Use the cost of the goods sold, not an arbitrary supplier catalogue price. Delivery allocation and other costs may need including under your accounting policy. Keep the assumptions written beside the calculation so the next person can reproduce it.
Calculate both percentages once
This original example uses £12 cost and £20 sales, with no further tax adjustment required in the example. Gross profit is £20 minus £12, or £8. Markup is £8 divided by £12, multiplied by 100: approximately 66.7%. Gross margin is £8 divided by £20, multiplied by 100: 40%.
The distinction matters when someone says 'add 40%'. Adding 40% to a £12 cost gives £16.80. The £4.80 gross profit is only 28.6% of the £16.80 sales value. It does not produce a 40% gross margin.
| Instruction | Selling price | Gross margin |
|---|---|---|
| Add 40% markup | £16.80 | 28.6% |
| Set 40% gross margin | £20.00 | 40.0% |
| Double the cost | £24.00 | 50.0% |
Work backwards from a target margin
The arithmetic is selling price = cost ÷ (1 − target margin as a decimal). At £12 cost and a target of 40%, calculate £12 ÷ 0.60 = £20. A spreadsheet can use =A2/(1-B2), where A2 is cost and B2 is entered as 40%.
A target is a planning choice, not an industry entitlement. The price still has to fit customer demand and your wider costs. The Australian Government's pricing guidance is useful for that general cost-and-market principle; its tax and legal sections are not UK rules.
Further reading: Australian Government: Choose a pricing strategy
Do not call gross margin take-home profit
The £8 in this example is still needed to help pay rent, wages and other costs. Payment fees, packaging, returns and discounts can also affect the amount left, depending on what your cost definition includes. A healthy-looking gross margin does not guarantee a healthy business.
If you want a contribution calculation, specify all variable costs you subtract. Keep that measure separate from gross margin in your reports. Changing the definition between weeks can create an apparent improvement that is just a different calculation.
Check the pricing sheet for ambiguous labels
Rename columns to 'markup on cost' and 'gross margin on sales'. Include the formula, tax basis and cost date. Test one item manually before copying a spreadsheet formula down hundreds of rows.
Review items with changed supplier costs or heavy promotions first. A useful check is to calculate the result from the actual selling price after discounts, rather than the full price you hoped to charge. Ask whoever maintains prices to explain one row back to you; that reveals misunderstandings much faster than another complicated dashboard.
Unpickle helps teams record deliveries and carry out stock counts. Use your accounting or retail system for price setting and margin calculations; Unpickle does not replace them. Keep operational records alongside your pricing work.