How to Compute Profit Margin and Markup

One of the biggest challenges for new business owners is understanding when and how their business is actually making a profit. Many small businesses struggle not because they don’t have great products or services, but because they don’t fully grasp their financial numbers—particularly gross profit, markup, and pricing strategies.

This guide will break down these crucial financial concepts and offer practical, real-world tips that are often overlooked. By the end, you’ll know how to price your products correctly, track profitability, and make smart financial decisions that ensure long-term success.

Understanding Gross Profit: Your Business Health Check

What is Gross Profit?

Gross profit is the amount of money left after subtracting the cost of goods sold (COGS) from your total sales revenue. It tells you how much you’re actually making from each sale before factoring in other expenses like rent, marketing, and salaries.

📌 Formula for Gross Profit:

Gross Profit = Sales – Cost of Goods Sold (COGS)

COGS includes only the direct costs of making or purchasing a product for resale. It does not include rent, office expenses, or advertising costs.

Example for Beginners:

Let’s say you sell grilled chicken meals at ₱150 each, and your COGS per meal (including chicken, rice, packaging, and cooking gas) is ₱60.

📌 Gross Profit per Meal:
₱150 (Selling Price) – ₱60 (COGS) = ₱90 Gross Profit

This means for every meal sold, you have ₱90 left to cover your other business expenses and generate profit.

Key Tip: Track Your Gross Profit Per Item!

Many new entrepreneurs don’t track their gross profit per product. They only check their bank balance at the end of the month! But by knowing the profit per item, you can easily identify:
✔ Which products are most profitable
✔ Which ones have high costs that need adjustment
✔ If your pricing is sustainable in the long run

Hidden Costs to Watch Out For

Sometimes, business owners overlook costs that quietly eat into profit. Make sure to track:
✔ Wastage – Spoiled food, defective items, or breakage
✔ Complimentary Items – Free sauces, condiments, utensils, and napkins
✔ Payment Fees – If you accept GCash, PayPal, or credit cards, they charge transaction fees that reduce profit
✔ Employee Meals – If you offer free meals to staff, that’s an added cost

The Difference Between Variable and Fixed Costs

To manage gross profit properly, you need to separate your expenses into variable costs and fixed costs.

📌 Variable Costs: These change based on how much product you sell. The more you sell, the more you spend on:

• Raw materials (chicken, rice, spices, etc.)

• Packaging (food containers, plastic bags)

• Direct labor (employees paid per output)

• Utilities used in production (cooking gas, electricity for kitchen)

• Shipping fees (if selling online)

📌 Fixed Costs: These stay the same no matter how much you sell. Examples include:

• Rent (for your restaurant, office, or storage)

• Salaries of permanent staff (e.g., managers, office workers)

• Marketing costs (Facebook ads, flyers, promotions)

• Insurance and permits

• Loan payments or business financing

Tip: Don’t Set Prices Without Factoring in Fixed Costs!

Many small business owners make the mistake of only looking at their variable costs when setting prices. This can be dangerous because even if you have a high gross profit, your fixed costs might be so high that you’re still losing money overall.

Gross Profit Margin: Are You Actually Making Money?

While gross profit is a peso amount, gross profit margin is a percentage that shows how efficiently you’re making money.

📌 Formula for Gross Profit Margin:

(Gross Profit / Sales) x 100 = Gross Profit Margin (%)

Example Calculation:

If your business made ₱100,000 in sales last month and your COGS was ₱40,000:

📌 Gross Profit = ₱100,000 – ₱40,000 = ₱60,000
📌 Gross Profit Margin = (₱60,000 / ₱100,000) x 100 = 60%

The higher your gross profit margin, the more money you keep from each sale.

Industry Benchmark:

✔ Restaurants typically have 35-60% gross profit margin
✔ Retail businesses (like clothing stores) have 40-70%
✔ Manufacturing companies have 25-50%

Tip: If your gross profit margin is below industry average, you might be underpricing your products or your costs are too high.

Markup: How to Set the Right Selling Price

Many beginners confuse markup with gross profit margin. The key difference is:
✔ Gross profit margin is based on the selling price.
✔ Markup is based on the cost to produce.

📌 Formula for Markup Percentage:

(Selling Price – Cost to Produce) / Cost to Produce x 100 = Markup %

Example:

If your product costs ₱50 to make, and you sell it for ₱100:

📌 Markup = (₱100 – ₱50) / ₱50 x 100 = 100% markup

This means you doubled your production cost when setting the price.

How to Choose the Right Markup?

1️⃣ Low Markup Strategy (20-50%) – Used for high-volume businesses like grocery stores and fast food. You sell more but earn less per item.
2️⃣ Medium Markup (50-150%) – Used in fashion, retail, and electronics.
3️⃣ High Markup (200-500%) – Used for luxury goods and specialty products.

Common Pricing Mistakes to Avoid

❌ Random Pricing – Setting prices based on guesswork instead of real numbers
❌ Ignoring Market Rates – Check competitor prices before finalizing your markup
❌ Too Low Pricing – Thinking that being the cheapest will always attract customers (it doesn’t!)
❌ Forgetting Discounts & Promos – Always include room for discounts when setting prices

Final Tips for New Business Owners

1️⃣ Always Track Profit Per Product – Don’t just check total sales; analyze which items make the most money.
2️⃣ Adjust Prices Regularly – Inflation, supplier costs, and demand change over time. Don’t be afraid to increase prices when needed.
3️⃣ Know Your Breakeven Point – Calculate how many units you must sell just to cover costs.
4️⃣ Don’t Undervalue Your Work – Many new business owners price too low because they fear losing customers. Remember, you need profit to grow!
5️⃣ Use Financial Tools – Spreadsheets, accounting software, or even a simple notebook to track daily costs and sales can help.

Conclusion: Mastering Profitability for Long-Term Success

Pricing, markup, and gross profit aren’t just financial terms—they’re the lifeline of your business. Understanding these concepts helps you set competitive prices, maximize profits, and avoid financial losses. Whether you’re running a small food stall or a retail store, keeping a close eye on costs, pricing, and profitability will set you up for long-term success.

Now, take action! Review your pricing strategy, calculate your profit margins, and start making informed business decisions today.