Gross margin is a profitability indicator that measures the difference between sales and the cost of products or services sold. It's the amount of money left over after subtracting the cost of goods sold (COGS) from sales.
Gross margin can be calculated using the following formula:
Gross margin = Sales - Cost of goods sold
For example, if a company sells products for a total of $10,000, with a cost of goods sold of $6,000, the gross margin would be $4,000.
Price mark-up, on the other hand, is a pricing strategy that involves adding a percentage to the cost of goods sold to determine the final selling price. This method is commonly used to set product selling prices.
Price mark-ups can be calculated using the following formula:
Selling price = Cost x (1 + Mark-up rate)
For example, if the cost of a product is $10 and the mark-up rate is 20%, the selling price would be $12.
The difference between gross margin and mark-up lies in the way they are calculated and used. Gross margin is a profitability indicator that measures the difference between sales and the cost of goods sold, while mark-up is a pricing strategy that involves adding a percentage to the cost of goods to determine the final selling price. Gross margin is used to assess a company's overall profitability, while price mark-ups are used to set product selling prices.
Example: If you have a product with a cost price of $3575 and you sell it for $5720, this represents a mark-up of 60% (i.e. a mark-up of 3575 x 0.6 = $2145). And your gross margin would effectively be 37.5%, because you generated a gross margin of $2155 by selling your product for $5720, which represents a gross margin of 2145 / 5720 = 0.375 or 37.5%.
