Core answer: Gross margin = (revenue − cost of goods sold) ÷ revenue × 100%. Buy at ¥60, sell at ¥100: margin = 40 ÷ 100 = 40%. Never confuse with markup: markup = profit ÷ COST (40 ÷ 60 = 66.7%). The conversion: margin = markup ÷ (1 + markup); a 100% markup is only a 50% margin. Retail benchmarks: grocery 15–25%, apparel 50–60%, restaurants 60–70% (food cost 28–35%), SaaS 70–85%.
Margin vs markup: the eternal confusion
| Basis | Formula | ¥60→¥100 example |
|---|---|---|
| Gross margin (on revenue) | (P−C)/P | 40% |
| Markup (on cost) | (P−C)/C | 66.7% |
Saying "we make 40%" means margin in finance, markup on the shop floor — always ask which. Pricing from cost with a target margin: price = cost ÷ (1 − margin). Cost ¥60, target margin 40% → price = 60 ÷ 0.6 = ¥100 ✓ (NOT 60 × 1.4 = ¥84 — that's a 40% markup = 28.6% margin).
The margin ladder to net profit
Revenue → −COGS → gross profit → −operating expenses (rent, payroll, marketing) → operating profit → −interest & taxes → net profit. A 40% gross margin with 32% opex leaves 8% operating margin — healthy for retail, thin for software.
Worked examples
Example 1 — The discount ceiling. Your margin is 30%. A "small" 20% discount on ¥100 (cost ¥70): new profit = 80 − 70 = ¥10 — margin collapses to 12.5% and you must sell 3× the volume for the same gross profit. Discounts come out of margin 100%.
Example 2 — Restaurant food cost. A dish sells ¥68, ingredients ¥19: food cost 27.9%, gross margin 72.1%. Industry rule: food cost 28–35%; above 38% the dish loses money after labor and rent.
Example 3 — Mix shift. Selling two products: A (margin 50%, 30% of sales) and B (margin 20%, 70%): blended margin = 0.3×50 + 0.7×20 = 29%. Growing B's share to 90% drops blended margin to 23% — revenue up, profit quality down.
Common mistakes and myths
- Markup/margin swap — the single most common small-business pricing bug; a "50% margin" achieved via 50% markup is really 33%.
- Forgetting shrinkage and waste in COGS — spoilage, theft, and comps belong in COGS; ignoring them inflates paper margins.
- Chasing revenue over margin — ¥1M at 8% net beats ¥2M at 2% net with half the risk and working capital.
- Benchmark blindness — comparing your 20% margin to SaaS's 75% is meaningless; compare within your industry quartile.
- Pricing by cost only — cost-plus guarantees leaving money on the table when value exceeds cost; margin is the floor, willingness-to-pay is the ceiling.