Let’s set the scene: you’re a business owner in New Zealand, aiming for a 30% gross profit margin on your sale price.
Note: Your target gross profit margin can be quite industry-specific—more on this in another blog here. And if terms like gross profit, costs, and margins are new to you—reading this blog here will help.
In your business, the cost to produce your product/service is $100.00. This is your direct cost, or cost of goods/services sold (COGS).
So, you might assume that to reach your target gross profit margin, your sale price should be:
= $100 + 30% = sale price should be $130.00 - right?
Right?
Wrong.
In this case, your actual gross profit margin is only 24%.
To get a 30% gross profit margin, you need a markup that’s higher than 30%, as markup and margin are not the same thing.
Because markup and margin are not the same thing.
Understanding Markup vs. Margin
As a business owner, it's important to understand the difference:
Margin is the profit you make after costs are deducted (like the example of 30% above).
Markup is the percentage added to the cost to determine the selling price.
If you want a 30% gross profit margin, marking up materials by 30% won’t cut it; the markup must be higher to achieve that margin.
It’s easy for our brains to simplify, but there’s a formula here that’s often overlooked:
Calculating the Right Markup
To achieve a 30% gross profit margin, here’s the formula to find the necessary markup:
markup = 30% / 1 - 30%
= 0.3 / 1 - 0.3
= 0.3 / 0.7
= 42.8%
This means you need a 43% markup to achieve a 30% gross profit margin.
The final step to find your selling price is:
Selling price = cost + markup
= $100 + 43%
= $143
Have a look at your Xero or job management software—are your gross profit margins where they should be? Remember, your sale price must cover direct costs, overheads, and profit.
Want me to check if your pricing is right?
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