What is the difference between 75% gross margin and 50% gross margin?
That’s easy, 25%. So you might be tempted to jump to the incorrect conclusion that if you currently have 50% gross margin and want to grow that number to 75%, you simply raise your price by 25%.
To go from 50% to 75% gross margin you have to double your price (assuming costs don’t change of course). Let’s go through an example.
The formula for gross margin is (Price-cost)/Price
You have a product that costs 1 dollar to make. You sell it for 2 dollars. Use the above formula (2-1)/2=0.5 or 50%.
If you double the price to 4 dollars, the new gross margin is (4-1)/4=0.75 or 75%.
The lesson is to not be fooled into thinking a certain percentage change in price results in a similar change in gross margin percent. When your gross margin is very small, small changes in price make large changes in gross margin %. When your gross margin % is very large, it takes large price moves to change the gross margin % even a little.
This is only important though if you are thinking in terms of gross margin %. Why would you think in terms of gross margin % and not gross margin dollars?