Margin is not a fixed, defined value in retail but an umbrella term for the gap between selling price and costs. Anyone quoting “the margin” may mean one of several calculations, and the results are far apart. That is why every margin figure should come with its formula.
Calculating margin: the three common formulas
Example: an item costs EUR 20.00 net to buy and sells for EUR 59.50 gross, which is EUR 50.00 net at 19% VAT.
| Metric | Formula | Example |
|---|---|---|
| Gross profit | net selling price − net purchase price | EUR 50.00 − EUR 20.00 = EUR 30.00 |
| Gross margin | gross profit ÷ net selling price × 100 | 30.00 ÷ 50.00 = 60% |
| Markup | gross profit ÷ net purchase price × 100 | 30.00 ÷ 20.00 = 150% |
| Contribution margin ratio | contribution margin ÷ net revenue × 100 | 16.57 ÷ 50.00 = 33.1% (see below) |
Gross margin and markup describe the same gross profit of EUR 30.00, once relative to the selling price, once relative to the purchase price. The gross margin can never reach 100%; the markup can.
Converting between gross margin and markup
Gross margin in % = markup ÷ (100 + markup) × 100
Markup in % = gross margin ÷ (100 − gross margin) × 100
In the example: 150 ÷ 250 × 100 = 60% and 60 ÷ 40 × 100 = 150%. If you calculate with a markup in purchasing and read a gross margin in your reporting, never compare the two values directly.
Common mistake: calculating with the gross price
If you use the gross price, the margin looks better than it is: (EUR 59.50 − EUR 20.00) ÷ EUR 59.50 gives 66.4% instead of 60%. The VAT is not yours, which is why the calculation uses net values.
Margin after marketplace costs: the contribution margin ratio
Gross margin and markup only know the purchase price. When selling via marketplaces or your own shop, however, further costs arise with every sale. If the example assumes 15% commission on the gross price (EUR 8.93) plus EUR 4.50 shipping and packaging, EUR 16.57 contribution margin remains. That is 33.1% of the net price, a good half of the gross margin.
With returns and advertising, the value falls further. How that is calculated is shown in the monthly example under Contribution margin.
Margin, contribution margin and profit
- Gross margin and markup tell you how much headroom the price leaves above the purchase price.
- Contribution margin and contribution margin ratio tell you what a sale contributes towards covering the fixed costs after all variable costs.
- Profit margin, also called return on sales, is the profit after all costs including the fixed ones, divided by the net revenue of a period. It can be calculated for the company, but not meaningfully for an individual sale.
For decisions on price, advertising and product range, the contribution margin per item is usually the more robust figure, because it includes the variable costs of the sales channel. Fixed channel costs such as a monthly base fee are added in the result for the period. How much of it advertising may consume is shown by the break-even ACOS.
Margin and contribution margin per item and channel
profitkonsole sets revenue, purchase prices, fees, shipping, returns and advertising against each other per item and shows contribution margin and margin for every connected channel.
Contribution margin, not revenue
Every sales channel in one dashboard: marketplace data and your own costs brought together, per item and per channel.