"Business is good, sales are up" and "I'm actually making more money" are two different claims, and a surprising number of shop owners are confident about the first without ever checking the second. Here's the actual math, with numbers, so you can check it yourself in five minutes.
The three numbers people mix up
Revenue is what customers paid you. Cost (or COGS — cost of goods sold) is what you paid to have that item to sell. Profit is the difference. That part's intuitive. Where people get tripped up is in how profit gets expressed as a percentage — margin and markup are not the same calculation, and mixing them up leads to real pricing mistakes.
Gross profit margin
This is profit as a percentage of what the customer paid.
Gross profit margin = (Revenue − Cost of goods) / Revenue × 100
Example: You buy a product for ₹200 and sell it for ₹280.
Profit = 280 − 200 = ₹80
Gross margin = 80 / 280 × 100 = 28.6%
So 28.6% of every rupee that comes in from that item is profit; the other 71.4% just covers what you paid for the item itself.
Markup — the one people confuse with margin
Markup is profit as a percentage of your cost, not your sell price.
Markup = (Revenue − Cost of goods) / Cost of goods × 100
Same example:
Markup = 80 / 200 × 100 = 40%
Same ₹80 profit, but 28.6% margin and 40% markup are both correct — they're just answering different questions. This is the single most common pricing mistake in small retail: someone hears "I need a 30% margin," sets a 30% markup instead, and ends up with a real margin of about 23% — noticeably thinner than intended, on every single sale, for as long as the mistake goes unnoticed.
| If you want this margin | Use this markup |
|---|---|
| 20% | 25% |
| 25% | 33.3% |
| 30% | 42.9% |
| 40% | 66.7% |
| 50% | 100% |
Net profit margin — the number that includes everything else
Gross margin only accounts for the cost of the item itself. Net margin subtracts everything — rent, electricity, staff wages, delivery, wastage, the works.
Net profit margin = (Revenue − Total costs) / Revenue × 100
Example: A shop does ₹500,000 in sales this month. Cost of goods sold is ₹350,000. Rent, wages, electricity, and other overhead add up to ₹100,000.
Gross profit = 500,000 − 350,000 = 150,000 → gross margin 30%
Net profit = 150,000 − 100,000 = 50,000 → net margin 10%
Gross margin looked healthy at 30%. Net margin — the number that actually reflects what you keep — is 10%. Both numbers are true and both matter, but only one of them is what's actually left in your pocket, and it's easy to feel good about the first one while not knowing the second at all.
Why this is harder to track than it sounds
The math above is simple. What's hard is doing it per item, per sale, continuously — not once a month when you sit down with a calculator, but as a running number you can check any day. That requires knowing your cost price for every item, keeping it updated as suppliers change prices, and having every sale logged against the right item's cost — by hand, in a notebook or a bare spreadsheet, this falls apart within a few months for most shops, not because the owner isn't disciplined, but because it's genuinely tedious to keep current.
This is the actual job an inventory-and-sales app should be doing for you — see free inventory apps for small business if you're comparing options, or BusinessX directly, which computes gross profit on every sale automatically from the cost and sell price you enter once per item, so the margin number is always current instead of a monthly estimate.