A buyer pays one amount for a product and expects to sell it for another. The difference is important, but it does not tell the whole story. To compare references or evaluate a promotion, you need to know both the amount left after merchandise cost and the proportion of sales that amount represents.
This guide uses hypothetical numbers to explain the arithmetic. They are not Toodobem prices, recommended retail prices or target margins. Use a consistent accounting basis for your own costs and sales, with the relevant treatment confirmed by the person responsible for your accounts.
At a glance
- Margin divides gross profit by sales; markup divides it by cost.
- A lower selling price changes both the profit amount and percentage.
- Gross profit still has to support costs outside the merchandise calculation.
In this guide
- Start with the two inputs
- Margin and markup answer different questions
- Test a lower selling price
- Do not mistake gross profit for money freely available
- Compare the collection on a weighted basis
Start with the two inputs
In this example, one item has an assigned merchandise cost of €20 and produces €50 in net sales revenue. The sales figure is after any discount and excludes transaction taxes for the purpose of the illustration. The cost figure is assumed to be complete for the merchandise basis being used; no additional cost is silently added later.
Shopify’s profit-report documentation calculates gross profit as net sales less recorded product cost, and gross margin as that difference divided by net sales. Using the same structure, the example produces €30 gross profit and a 60% gross margin.
The calculation is €50 minus €20 equals €30; then €30 divided by €50 equals 0.60, or 60%. Writing both steps helps reveal whether a spreadsheet is using the intended denominator.
Margin and markup answer different questions
Markup compares the same €30 difference with the €20 cost. Here, €30 divided by €20 equals 1.50, or 150%. A 60% margin and a 150% markup describe the same example. They are different percentages because one is measured against sales and the other against cost.
| Measure | Hypothetical calculation | Result |
|---|---|---|
| Gross profit | €50 − €20 | €30 |
| Gross margin | €30 ÷ €50 | 60% |
| Markup on cost | €30 ÷ €20 | 150% |
If two people use the word “margin” differently, an order discussion can go wrong while both calculations look internally correct. State the formula in the buying worksheet instead of relying on an informal phrase such as “double the cost”.
Test a lower selling price
Now suppose the same hypothetical item generates €40 in net sales revenue after a price reduction. The merchandise cost remains €20. Gross profit becomes €20, and gross margin becomes 50%. The revenue fell by €10, while the gross profit amount fell from €30 to €20.
That change matters when deciding whether a promotion is worthwhile. Selling more units may or may not compensate for the lower amount per unit. In this simplified example, three sales at €40 generate €60 gross profit, the same as two sales at €50. This comparison excludes any additional selling costs and assumes the stated merchandise cost remains unchanged.
Do not mistake gross profit for money freely available
The €30 in the first example is not a calculation of the boutique’s final profit. Costs outside the merchandise basis still need to be paid. Depending on your business and reporting method, these may include premises, staff, payment processing, marketing and other operating expenses.
Keep those costs visible in the wider business plan. A product-level margin helps compare merchandise decisions; it does not establish whether the entire shop is profitable. Nor does a high percentage guarantee a useful contribution if very few units sell.
You can also reverse the calculation to test a proposed target. With the same hypothetical €20 cost and a purely illustrative 60% margin, required net sales revenue is €20 divided by 0.40, or €50. This checks the arithmetic; it does not demonstrate that customers will accept that price or that 60% suits your business.
Compare the collection on a weighted basis
When several references sell at different prices and quantities, add their net sales and merchandise costs before calculating the combined margin. Do not simply average individual percentages unless the underlying sales amounts justify that treatment. A small item and a much larger sale should not automatically carry equal weight.
For planning, use more than one sales scenario. Keep the original price case, a plausible lower-price case and the quantities required in each. These are decision models, not forecasts presented as facts.
When building a shortlist in the Toodobem catalogue, calculate each proposed reference using the same definitions. Then assess the resulting amounts alongside customer relevance and stock commitment. Clear arithmetic makes the trade-offs visible without pretending that one percentage can make the buying decision for you.
