Gross margin is the percentage of profit made by the manufacturer and the retailer from a transaction. If you have a product to sell, you need to know how to price your product to make sure everyone involved makes a profit.
- Step 1: Understand the importance of the retailer's gross margin. Many have a minimum margin requirement, oftentimes 50 percent or higher, so knowing this will affect how you price your product.
- TIP: The retailer's minimum margin requirement is also known as the keystone markup.
- Step 2: Use the keystone markup as a starting point in pricing that will give your retailer the desired margin. For example, if you sell your product wholesale to the retailer for $5, the retailer will have to charge customers $10 to achieve the keystone markup.
- FACT: Retail items with big markups include brand-name clothing, with a markup of 500 to 1,000 percent, and greeting cards, which carry an average markup of 100 to 200 percent.
- Step 3: Figure the retailer's gross margin in the same way. Divide the retailer's markup of $6 by their price of $10 to get .60, or 60 percent. The retailer's 150 percent markup has resulted in a 60 percent gross margin.
- Step 4: Calculate your gross margin using your manufacturer markup. Divide your markup of $2 by the price the retailer paid for it of $4. Your gross margin as manufacturer is then 50 percent, or two divided by four. Your 200 percent markup resulted in a gross margin of 50 percent.
- Step 5: Find the percentage of your markup by dividing the markup amount by the cost to make the product. Your markup of $2 is divided by the manufacturing cost of $1 to arrive at $2, which would be 200 percent.
- TIP: Move the decimal point two places to the right to find the percentage. For example, $2.00 = 200 percent.
- Step 6: Find the retailer markup. If the retailer sells your product for $10, and its markup is $6, the ratio is six divided by four, or 150 percent.
- Step 7: Determine your current markup amount. If your product is manufactured for $2 per unit and you sell it wholesale to a retail store for $4, your markup is $2.