Revenue is vanity, profit is sanity, and for a trader the margin on each product is where the truth lives. A business can grow its sales every month and shrink its profit if the wrong products and customers grow fastest. This guide explains gross profit, margin and markup in plain terms, and how to analyse them by product and customer.
Gross profit in one line
Gross profit = sales − cost of goods sold
Sales are what customers paid or owe you. Cost of goods sold is what the goods you sold cost you, valued by your costing method. Gross profit pays for rent, salaries and everything else.
Margin and markup are not the same
| Term | Formula | Example (cost 700, price 1,000) |
|---|---|---|
| Gross margin % | (price − cost) ÷ price | 300 ÷ 1,000 = 30% |
| Markup % | (price − cost) ÷ cost | 300 ÷ 700 = 42.9% |
Mixing them up is expensive. A 30 percent markup on cost is only a 23 percent margin. If you want a 30 percent margin, you need a price of cost ÷ 0.70.
Where the margin goes
The price on the list is not the price you earn. Margin is eaten by:
- Discounts. A 5 percent discount on a 20 percent margin takes a quarter of your profit.
- Returns. The sale disappears, and sometimes the goods lose value.
- Cost changes. A supplier raises prices and your average cost rises while your selling price stays.
- Mix. More of the low-margin product, less of the high-margin one.
Example: a product sells at Rs 1,000 with a cost of Rs 800, a margin of 20 percent. A 5 percent discount makes the price Rs 950. The profit is now Rs 150, not Rs 200. Profit fell by 25 percent from a 5 percent discount.
Analysing by product
A simple table shows where profit comes from:
| Product | Revenue (Rs) | Cost (Rs) | Gross profit (Rs) | Margin |
|---|---|---|---|---|
| A | 400,000 | 280,000 | 120,000 | 30% |
| B | 300,000 | 255,000 | 45,000 | 15% |
| C | 300,000 | 195,000 | 105,000 | 35% |
| Total | 1,000,000 | 730,000 | 270,000 | 27% |
Product B brings in 30 percent of revenue but only 17 percent of the profit (45,000 ÷ 270,000). That is the product to review: raise the price, cut the discount or change the supplier.
Analysing by customer
Some customers buy a lot at deep discounts. Their sales look good and their profit is thin. List revenue, cost and margin for each customer, and ask whether the biggest customer is the most profitable.
Analysing by period
Look at gross margin month by month. A sudden fall usually means cost increases not passed on, discounts creeping up or a change in mix.
Questions to ask each month
- Is the gross margin higher or lower than last month?
- Which products and customers earn the most profit, not the most revenue?
- Which products are sold below the margin you want?
- How much did returns and discounts cost?
- Are costs rising faster than prices?
Common mistakes
- Reporting revenue instead of profit.
- Confusing margin with markup.
- Ignoring discounts and returns.
- Using list price instead of the price actually charged.
- Costs that are out of date. Margin is only as good as the cost behind it.
How OneAccounts does it
OneAccounts has a profit and loss analysis report that groups by day, product or customer. It shows revenue, cost of goods sold and margin, includes both invoices and cash sales, and nets off returns. The cost used is the running average cost at the time of sale, saved on each invoice line. The trading dashboard shows revenue, expenses, gross profit, cash and bank, receivables, payables and overdue invoices for a period you choose.
See Trading ERP software and average cost explained.
Frequently asked questions
What is the difference between gross profit and net profit?
Gross profit is sales minus cost of goods sold. Net profit is what remains after all other expenses.
What is a good gross margin?
It depends on the trade. Compare with your own history and with your industry.
Why is my profit falling when sales are rising?
Common causes are deeper discounts, rising costs, returns and a shift to low-margin products.
How do I convert markup to margin?
Margin = markup ÷ (1 + markup). A 25 percent markup is a 20 percent margin.
How often should I review margins?
Monthly, by product and by customer.