What is gross profit margin (GP)?
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TL;DR
What is left of each sale after the cost of the goods sold, as a percentage of the sale.
In UK hospitality you will hear "what GP are we running at?" more than almost any other question. Gross profit is what a sale leaves you after paying for the goods in it — the ingredients in a dish, the stock behind a T-shirt. The margin is that profit as a share of the sale.
The formula
Gross profit = net sales − cost of goods sold
Gross profit margin = gross profit ÷ net sales × 100
"Net sales" means after VAT, discounts and refunds — the money that is actually yours.
A worked example
A latte sells for £3.60 including 20% VAT, so £3.00 is yours. The coffee, milk and cup cost £0.60.
Gross profit is £3.00 − £0.60 = £2.40, and the margin is £2.40 ÷ £3.00 = 80%.
If you had worked from £3.60 instead, you would have reported 83% — a margin that does not exist.
Gross profit is not the profit you keep
Gross profit pays for everything else: wages, rent, energy, card fees, insurance. A dish can run at 70% GP and still lose money if it takes a chef twenty minutes to make. That is why restaurants watch prime cost as well.
Why it matters
- It shows which products pay for the business and which only keep customers happy.
- It is how you set prices: decide the margin you need, then price to reach it.
- A falling GP with steady prices means costs have crept up, or stock is going missing.
Common mistakes
- Confusing margin with markup. A 50% markup is only a 33% margin. See margin vs markup.
- Working from prices that include VAT. It flatters every margin by the whole VAT fraction.
- Looking only at the average. One high-margin best-seller can hide a menu full of weak dishes — menu engineering separates them.
Tracking it in DUMA
Every menu item with a recipe shows its cost and margin, with VAT taken out when you are VAT-registered, so the number matches what you keep. The Menu engineering report sets each item's margin against how often it sells, and Item & category sales shows units and sales for every item.
Questions and answers
What is a good gross profit margin for a restaurant?
Food often runs at 65–75% GP and drinks higher, but it varies by concept. Compare yourself month to month before you compare yourself to anyone else.
What is the difference between gross and net profit?
Gross profit only takes off the cost of the goods sold. Net profit takes off everything — wages, rent, bills, tax — and is what the business actually earned.
Do discounts affect gross profit margin?
Yes. A discount lowers the sale but not the cost, so the margin on that sale falls. Track discounts separately so you can see what they cost you.