Gross margin comes up in every range review, every supplier negotiation and every conversation with your merchandiser. Most buyers enter the profession without being taught how it is calculated or how to use it as a planning tool rather than a number they report.
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Gross Margin as a Report Against Margin as a Decision
Two quite different things get called margin, and separating them is where the skill starts.
As a reporting number, margin tells you what happened. You bought a product, you sold it, and the difference between cost and selling price is expressed as a percentage of the selling price. Your finance team looks at that figure at the end of a period and forms a view about whether the buying decisions were sound.
As a decision making tool, margin tells you what to do next. It is not something you discover afterwards, it is the number you plan towards from the beginning. Using it that way means asking at every point what margin you are building in, which requires you to hold the target in your head before you sit down with a supplier, before you confirm a cost, and before you settle a retail price.
Like open to buy, this is rarely taught. You are expected to absorb it, pick it up as you go, or work it out through experience.
Podcast Thrive in Fashion Buying & Merchandising
Episode 043, How to Speak Confidently about Margin as a Buyer.
Being comfortable with margin is a foundational commercial skill rather than an advanced one, and the gap between reporting it and planning with it is a training gap rather than a talent gap. The Thrive in Fashion Buying and Merchandising course closes it, alongside open to buy and range planning.
Gross Margin: The One Used Most Often
Part of why margin feels complicated is that the same word means slightly different things depending on who is speaking. Three terms are worth separating properly.
Gross margin is calculated from the landed cost, which is the product cost plus everything required to get it into store: freight, duties, handling, quality and compliance costs. It accounts for the full cost of getting product to your door. It is the difference between net sales and cost of goods sold, expressed as a percentage of net sales.
The formula is retail price minus landed cost, divided by retail price, multiplied by one hundred. If your target is 60 per cent and you are achieving 54, that gap is yours to explain and to address.
Where does the retail price come from? It comes back to range planning. All the planning, the decisions and the market research done at the start of a season is what determines whether the price architecture holds and therefore whether the margin does.
Initial Markup: The One You Control
Initial markup, sometimes called IMU, is calculated earlier in the process. It is the margin built in at the point of buying, typically from the supplier cost price, before the additional costs are fully known or applied.
It is the first markup applied to get from cost to retail, the starting point before the full cost picture is built out. That is why initial markup is almost always a higher percentage than gross margin: it does not yet account for markdowns, shrinkage or the full landed cost.
This is the number you control most directly. It is the margin you design into the range at the buying stage, and because markdown will happen across the season, it needs to be set high enough to survive it.
Achieved Margin: The One in Your Review
Achieved margin, also called realised or net margin, is what you actually end up with after the range has traded. Markdowns, discounting, promotional activity, end of season clearance, and any stock that never sold at full price all come out of it.
This is the figure that appears in your performance review, and the gap between your gross margin and your achieved margin is the most informative number you have. It tells you how much of the range sold at full price and how much discounting was required to clear the rest.
One point of caution. Gross margin and initial markup get quoted interchangeably in buying offices and they are not the same number. I have always worked with gross margin, meaning the initial supplier cost plus the add-ons. When someone quotes a margin figure at you, it is worth establishing which one they mean before you agree it is good or bad.
You Do Not Hit the Same Margin on Every Product
Buyers who are new to margin targets often assume the target applies product by product. It does not, and trying to make it work that way causes unnecessary problems.
You are not buying products one at a time. You are working from a range plan, and the gross margin target applies to that plan as a whole. There are too many variables for identical margins across it: the type of product, the supplier producing it, their cost base and overheads. From experience, achieving the same specific margin with every supplier is not possible without compromising something you should not compromise.
The skill is working across the range plan, negotiating each product with its supplier, and still delivering the overall target. Some products carry more, others carry less, and the composition is a decision you make rather than an outcome you accept.
What Commercial Margin Thinking Looks Like
Here is the sequence, using a situation you will recognise.
You are at a trade show. The design is right, the fabric feels good, and the supplier is one you have worked with before. The wholesale cost is 48. You work out that you need roughly a 2.5 times markup to hit your target margin, which puts the retail at 120.
Then comes the second question, which matters as much as the first. Will your customer pay 120 for this? Because if your market sits at 85 or 95 for that product, you do not have a margin problem. You have a buying decision to make.
Do you negotiate the cost down? Do you change the specification? Or do you walk away and spend the budget elsewhere? That sequence, cost to markup to retail viability, is what commercial margin thinking looks like. Most buyers can do the arithmetic. What takes longer to develop is running that sequence automatically, before you have talked yourself into a product you like.
How to Answer the Question Everyone Dreads
You are in a range review, the sales data is on the screen, a category has underperformed, and a senior buyer asks what happened to the margin here.
The answer most buyers give sounds like this. The markdown was higher than we planned because sell-through was slower than expected. That is technically accurate and almost useless, because it describes the symptom rather than the cause.
A buyer thinking commercially answers differently. The gross margin on the category was 60 per cent and we needed 58 on achieved. We had price points that were too high for the volume we were buying into, full-price sell-through was slower than anticipated, and one particular style had to be marked down.
The difference is not that the second answer sounds more impressive. It is that it traces the outcome back to specific buying decisions and offers an explanation. Getting from the first answer to the second does not require more data or more years in the role. It requires understanding how your decisions connect to the result, which is something you can learn and practise deliberately.
Elisabeth's Final Thoughts
Margin is not an advanced skill reserved for senior buyers. It is foundational, and every buyer should be comfortable with it early, which is awkward given how few are actually taught it. The gap between the buyer who reports a margin and the buyer who plans towards it and can articulate it is not a talent gap. It is a training gap, and training gaps close.
Gross Margin FAQs
Gross margin is the difference between your net sales and your cost of goods sold, expressed as a percentage of net sales. It is calculated from the landed cost, which is the product cost plus freight, duties, handling and any compliance costs. The formula is retail price minus landed cost, divided by retail price, multiplied by one hundred.
Initial markup is calculated earlier, from the supplier cost price before the full landed cost is known and before markdowns. It is the margin you design into the range at the buying stage and it is almost always a higher percentage than gross margin. The two are often quoted interchangeably in buying offices and they are not the same number.
Achieved margin, sometimes called realised or net margin, is what you actually end up with after selling through the range, including markdowns, promotional activity and end of season clearance. It is the margin that appears in your performance review. The gap between gross and achieved margin tells you how much discounting was needed to clear the range.
No, and it is not realistic to try. You work from a range plan, and the gross margin target applies to that plan as a whole. Different products, suppliers and cost structures make identical margins impossible without compromising elsewhere. The skill is negotiating across the range so the overall target is met.
Trace the outcome back to specific buying decisions rather than describing the symptom. Saying markdown was higher because sell-through was slower is accurate and unhelpful. Naming the target, the gap, the price points that were wrong for the volume bought and the specific style that had to be cleared demonstrates that you understand the connection between your decisions and the result.
