Lessons Learned: How to calculate Gross Margin

I seem to have to answer this question 1 or 2 times a month for newbies inside the business or for the same guy which throws away my email every time I give it to him, so I thought I would do a lessons learned on Margin.

Sometimes I’ve heard folks say [tag]contribution margin[/tag], but not right and NOT interchangeable. Here is the formula for determining [tag]Gross Margin[/tag]:

Gross Margin = Revenue – [tag]Cost of Goods Sold[/tag] – This formula produces gross [tag]margin dollars[/tag], but not a ratio or percent which is the generally accepted way to look at it as a % of revenue.

Gross Margin % = (revenue-costs of goods)/Revenue. (FYI – thats the [tag]excel formula[/tag] too)

Costs of Goods Sold is often referred to as [tag]COGS[/tag] and are the direct costs associated with delivery/production.

DON’T CONFUSE MARGIN WITH MARKUP!  Here is a quick and dirty markup overview from Wikipedia:

The formula to convert a Markup to Gross Margin is:

Gross Margin (GM) = 100% – (100% /(100% + [tag]Markup[/tag]))

Examples:

  • Markup = 100%
  • GM = 100% – ( 100% / 200% ) = 50%
  • Markup = 66%
  • GM = 100% – ( 100% / 166% ) = 39.8%
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4 Comments

  • Reply spatially relevant » Blog Archive » Top 5 Posts: 2007 Keyword Traffic December 21, 2007 at 6:30 am

    […] How to Calculate Gross Margin:  From a set of questions I repeatedly get asked, now I have a URL to send and apparently a URL for people to search on too.  This one get hits directly off the title. […]

  • Reply spatially relevant » Blog Archive » It’s official! I suck April 16, 2008 at 9:38 pm

    […] Lessons Learned: How to calculate Gross Margin […]

  • Reply Jorge Rojas October 22, 2009 at 1:52 pm

    hi

    i wanto to know which is the difference between this two formulas, both formulas show how to calculate the gross Margin

    (revenue-cost of goods sold)/revenue

    and

    (revenue-cost of goods sold)/cost of goods sold

    • Reply Jon Gatrell October 22, 2009 at 4:28 pm

      so markup if the incremental amount above the COGS. The first formula is the example of gross margin in $, the second is % and the third example provides insight into mark up being an attribute of how to determine margin. It always depends on what you are trying to solve for – GM$, GM% or mark up.

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