A shop buys an item for £10 and sells it for £15. It has added £5 to the cost: a 50% markup. Yet its gross margin is 33⅓%. The same £5 sits above two different starting numbers.
That difference matters when a headline moves from the price on a label to the profitability of a listed business. It matters again when the label acquires a discount sticker. Neither calculation tells us the final profit after all the other bills.
Fact: give the denominator a name
In this hypothetical example, markup is the difference between selling price and cost divided by cost: £5 ÷ £10. Gross margin divides gross profit by revenue: £5 ÷ £15. Multiply each result by 100 to express it as a percentage.
For the example, assume the £10 covers all cost of sales, the £15 is revenue after any returns, and neither figure includes VAT. There are no delivery costs, rebates or stock adjustments hiding elsewhere. Real accounts need those boundaries checked.
Worked example
One £5 difference, two percentages
Markup
£5 ÷ £10 cost
Gross margin
£5 ÷ £15 sales
A 50% gross margin would require a £20 selling price at that unchanged £10 cost. That is a 100% markup. Moving between the two measures without naming the denominator can make ordinary pricing sound much more profitable than it is.
A small discount can take a larger bite
Now cut the £15 price by 20%. Revenue per item becomes £12. If cost stays £10, gross profit falls from £5 to £2, a 60% reduction. Gross margin becomes £2 ÷ £12, or 16⅔%.
The discount is measured against the selling price. The fall in gross profit is measured against the earlier £5 profit. These are different comparisons, so the percentages need not match. The lower margin is also a change of 16⅔ percentage points from the original 33⅓%.
At £2 gross profit per item, the shop would have to sell 2.5 times as many items to match the original total gross profit, assuming unchanged unit costs and no additional costs from serving the extra sales. That is 150% more units. This is a calculation, not a forecast of customer behaviour.
A discount can still be economically sensible if stock would otherwise remain unsold, lose value or consume storage space. The comparison then includes the realistic alternative use of that stock. Our example holds those complications aside so the arithmetic stays visible.
What three company filings actually establish
Fact. NIKE, Inc. (NYSE: NKE) identifies lower average selling prices, including higher discounts and channel mix, as a drag within its gross-margin analysis for the quarter ended 31 August 2026. Lower warehousing and logistics costs helped in the other direction. Its quarterly filing shows why the discount alone cannot explain the total movement.
lululemon athletica inc. (NASDAQ: LULU) also discusses markdowns in its filing for the period ended 2 August 2026. Its gross-margin analysis includes tariff refunds as well as higher tariffs, pricing and product costs. A reported improvement therefore requires a check of what created it and whether that contribution can recur.
Deckers Outdoor Corporation (NYSE: DECK), whose brands include HOKA and UGG, reports different brand gross margins in its quarter ended 30 June 2026. That adds another complication: a group margin can change when the sales mix changes, even without an identical change in each product’s economics.
These are three different reporting periods and business models. They are examples of how to investigate a margin, rather than a ranking of which company earns the most on a comparable item. No shelf price or manufacturing markup has been inferred from their consolidated accounts.
Interpretation: who could benefit?
For Nike, a reduction in the need for discounts could preserve revenue per item and gross profit, provided product costs and the sales mix do not deteriorate enough to offset it. The relevant horizon is the coming selling seasons and quarters. The evidence would be the next margin explanation alongside sales and stock trends; the size of the benefit cannot be read from a discount headline alone.
For Deckers, a greater share of sales from a higher-margin brand could improve the group proportion even if the other brand’s own margin did not move. That is a conditional mix mechanism grounded in its separate brand disclosures. It would need sufficient scale, and it could be offset by weaker margins within either brand. A better group percentage does not itself establish stronger demand everywhere.
Interpretation: who’s at risk?
lululemon illustrates the risk of treating a favourable cost adjustment as a lasting increase in pricing power. Tariff-related effects and markdowns belong in the explanation alongside the headline ratio. If a helpful contribution does not recur while discounting pressure continues, the next period’s margin could look weaker. This is a scenario to test, not a claim that it will happen.
Nike faces the same arithmetic risk as the fictional shop when a lower selling price is not matched by lower costs. Its disclosed logistics and product-cost movements also show potential offsets. Across all three companies, gross profit still has to cover expenses below that line. A margin improvement can coexist with weaker operating profit if those expenses rise sufficiently.
Speculation has a separate job
A forecast that shoppers will accept higher prices, or that promotions will disappear next season, needs evidence beyond these calculations. We assign no probability to either outcome. Neither the toy example nor a company margin percentage determines a share-price response.
For the next headline, keep three amounts together: revenue, cost of sales and gross profit. Then read the company’s explanation of price, costs and mix, using the same reporting period. Check operating expenses separately before reaching a conclusion about the whole business.
The limitation is practical: published group accounts rarely reveal the economics of one particular item. This explanation clarifies the denominator; it cannot reconstruct an undisclosed product ledger. Evidence of sustained full-price sales, changing stock levels and recurring cost savings would alter the business assessment. A larger percentage without those details would leave it unfinished.
Sources checked 16 October 2026. Worked examples are hypothetical. This article is for financial information and education, not personalised investment advice.
Photo by cottonbro studio on Pexels. Assorted clothes on shop racks.