Difference Between Gross Profit & Mark-Up

Difference Between Gross Profit & Mark-Up

In the retail business, it is important to know the difference between gross profit and mark-up as you are pricing out your items. The two are very similar. Gross profit is a percentage of sales while mark-up is the difference between cost and sales price. Below is a simple example of how to differentiate the two.

  • Gross Profit

    Operating expenses fall into the gross profit (GP) category where the expenses are deducted from GP to determine net-income profit. Gross profit ratio expresses the margin as a percentage of sales. The gross profit can be defined as the amount of sales minus cost of goods sold. If the product was sold for $10 and has a cost of $8, the gross profit margin is $2 Therefore, the gross profit margin is 20% ($2 divided by $10).

  • Mark-Up

    The mark-up is expected to cover store costs and allow the store to earn a return on the product. Mark-up is used several different ways, but the most common definition is the difference between a product’s cost and its selling price. Going back to the example above, the product is sold for $10 and its cost is $8. The product had a mark-up of $2.

It is important to know both your GP and MU to keep your business running. Your point of sale solution should be able to show you what both GP and MU is on your items and run sales reports to help you make educated business decisions.