How to calculate gross and net margin, avoid the margin vs markup trap and improve profitability in a retail store.
| Measure | Formula | What it tells you |
|---|---|---|
| Gross profit | Sales minus cost of goods sold (COGS) | Money left after paying for the products sold |
| Gross profit margin | Gross profit divided by sales, times 100 | How much of each sales dollar is left after product cost |
| Net profit | Gross profit minus operating expenses (labor, rent, utilities, marketing and so on) | What the business actually earns |
| Net profit margin | Net profit divided by sales, times 100 | How much of each sales dollar is profit |
Our profit margin calculator and cost of goods sold calculator do the math for you.
These figures are illustrative only:
| Item | Amount |
|---|---|
| Sales | $100,000 |
| Cost of goods sold | $55,000 |
| Gross profit | $45,000 |
| Gross margin | 45% |
| Labor, rent, utilities and other operating costs | $38,000 |
| Net profit | $7,000 |
| Net margin | 7% |
A healthy gross margin can still produce a thin net margin if operating costs, especially labor and rent, are high. That is why both numbers matter.
Markup is profit as a share of cost; margin is profit as a share of the selling price. If an item costs $10 and sells for $15, the markup is 50% ($5 divided by $10), but the margin is 33% ($5 divided by $15). Confusing the two is a common pricing mistake: a 50% markup does not give a 50% margin. Set prices from the margin you need, using: price = cost divided by (1 minus target margin). For a 40% margin on a $10 item, the price is $10 divided by 0.6, or about $16.67.
Different categories carry very different margins. Accessories, private-label products and services often earn more per sale than well-known branded items that customers compare online. Calculate margin by category every month and look at both the margin percentage and the total gross profit dollars each category brings in. A low-margin category may still be valuable if it drives traffic, while a high-margin category with little volume may deserve better placement. Use this view when deciding where to put displays, staff attention and promotions.
For many retailers, labor is one of the largest controllable expenses. Track labor cost as a percentage of sales by week and by store, and sales per labor hour by day and hour. When labor percentage rises, check whether the cause is lower sales, overstaffing, overtime or rate increases. Our guide on how to calculate labor cost and the labor cost percentage calculator help you track this. Cutting labor too far, though, can hurt service and sales, so aim to match staffing to demand rather than simply reduce hours.
Store managers influence margin every day through ordering, discounts, scheduling and shrinkage control. Share margin and labor numbers with them monthly, explain how their decisions affect results and set a few clear targets. Managers who understand the numbers make better trade-offs between cost and service.
EZTime helps retailers keep labor in line with sales. Managers can schedule to traffic with scheduling software, see projected overtime before publishing and use the attendance clock to compare scheduled and actual hours. Approved hours export to payroll, reducing errors. See EZTime for retail.
Gross margin is (sales minus COGS) divided by sales. Net margin is net profit after all expenses divided by sales.
Markup is profit as a share of cost; margin is profit as a share of the selling price. A 50% markup equals about a 33% margin.
It varies widely by category and business model. Compare your margins over time and with similar retailers rather than one benchmark.
Price with margin in mind, buy better, reduce shrinkage and markdowns, promote higher-margin items and control labor and overhead.
Yes. Labor is one of the largest controllable costs in retail and directly affects net margin.
Gross margin monthly, ideally by category, and net margin monthly or quarterly.
Inbound freight to get products into your store is usually included in product cost. Ask your accountant how to treat costs in your books.
With jobs and clients tagged in EZTime, you can compare what you quoted with the hours the work really took. Pricing starts at $2 per employee each month, with a $20 monthly minimum.