## Definition of Gross Margin

Gross margin or gross profit is defined as net sales minus the cost of goods sold.

However, some people intend for the term *gross margin* to mean the gross margin as a percentage of sales (or percentage of selling price). Others will use the term *gross margin ratio* to mean the gross margin as percentage of sales or selling price.

## Example of Gross Margin

If a retailer sells a product for $10, and its cost was $8, the gross profit or gross margin is $2.

The *gross margin ratio* is 20%, which is the gross profit or gross margin of $2 divided by the selling price of $10.

## Definition of Markup

Markup in dollars is the difference between a product’s cost and its selling price. [Note: some retailers may use the term markup to mean an *additional markup* from an earlier selling price.]

The markup is also expressed as a percentage of cost (not selling price).

## Example of Markup

Assume that a product has a cost of $8 and the seller sets a selling price of $10. In dollars, the markup is $2 (the same as the $2 gross profit).

However, the markup is usually expressed as a percentage of the product’s cost (not its selling price). Therefore, the $2 markup divided by the product’s cost of $8 results in a markup that is 25% of cost.

Thus, if a retailer wants its income statement to show a gross profit that is 20% of sales, the retailer must mark up its products’ costs by 25%.