Page 80 - Paulisms: Gold Nuggets for Small Business

nine out of ten people will not know the answer. Try and get them to work out a gross profit margin, and the result will be similar.
Unless you grasp the science of gross profit margins, it is hard to run a successful business. You must know. You must control your margin.
Even many experienced people still talk about mark-up as opposed to gross profit margin, and this is a big error which results in people getting their pricing wrong. Business is all about margin. I repeat: business is all about margin!
Gross profit margin is the revenue (turnover) less the cost of goods sold (COGS), recorded either as a percentage or a dollar amount.
Here are some examples to show the difference and put it into use.
If you have a product that cost $100 to buy in and you mark it up by 33%, its selling price is $133. That means you are making $33 (the difference between $100 and $133). The gross profit margin is $33.
If the gross profit margin ($33) is divided by the selling price ($133), this equates to a 25% gross profit margin as a percentage. (i.e. $33 / $133 = 0.25 or 25%). In many people’s minds, they think that having marked it up by 33% they’re making 33%. Actually, they’re making a 25% gross profit margin. Big difference!
If you have the cost price and want to work out a 20% gross profit margin, divide the cost price by 80% (or 0.8), which is 100% minus the 20% gross profit margin you want to add to