Profit Margin Calculator
Calculate profit margin from cost and price, or work backwards to the price you need to hit a target margin. Shows markup alongside it.
How to use this calculator
- 1Pick what you are solving for. Most people want either the margin on a known price, or the price needed for a target margin.
- 2Enter the two figures you know.
- 3Set units sold to scale the answer to a whole order or product line.
How the calculation works
Margin % = (Price − Cost) / Price × 100 Price = Cost / (1 − Margin)- Price
- What the customer pays
- Cost
- What the item costs you
- Margin
- Profit as a share of the selling price
Margin is always calculated against price; markup is calculated against cost. Confusing the two is the single most common pricing error in small businesses.
Solving for price requires dividing by (1 − margin), not multiplying by (1 + margin). Adding 40% to cost gives a 28.6% margin, not 40%.
Worked example
An item costing $60 sold at $100
- 1.Profit is 100 − 60 = $40.
- 2.Margin = 40 ÷ 100 = 40%.
- 3.Markup = 40 ÷ 60 = 66.7%. The same $40 profit, expressed against a different base.
Result: 40% margin (66.7% markup)
What profit margin actually measures
Profit margin answers one question: out of every dollar a business takes in, how much is left over after paying for what was sold? A margin of 25% means a quarter of each sale is profit and the rest covered the cost of getting that product or service out the door. It is expressed as a percentage rather than a raw dollar figure precisely so that a corner shop and a multinational can be compared on the same footing, regardless of how much either one actually sells.
Margin is an accounting measure, not a cash-flow one. A business can report a healthy margin on paper while still running short of cash if customers pay late or inventory ties up money for months before it sells — which is why margin is usually read alongside, not instead of, revenue growth and cash flow.
The layers of margin
Margin is not a single number. Businesses typically track it at three levels, each stripping out a wider set of costs, because a company that looks profitable at one layer can look very different at the next.
- Gross margin — revenue minus the direct cost of the goods or services sold — materials, production labour, the wholesale price of what got resold. It shows how profitable the core product is before business overhead is even considered.
- Operating margin — gross profit minus the day-to-day running costs of the business — rent, salaries, marketing, administration. This is closer to what the business actually earns from operating the way it currently does.
- Net margin — what remains after absolutely everything, including interest on debt and tax. It is the "bottom line" figure investors quote most often, but the one most sensitive to one-off events like a lawsuit settlement or an asset sale.
Margin versus markup — the mix-up that costs money
The two numbers describe the same profit but divide it by a different base — margin divides by price, markup divides by cost — and because price is always larger than cost on a profitable sale, markup is always the bigger percentage of the two. Mixing them up is a common and expensive pricing mistake: a retailer who wants a 40% margin but sets prices using a 40% markup instead ends up with only about 28.6% margin, quietly giving away more profit than intended on every sale.
Using margin to price and to diagnose the business
Beyond checking whether a single sale is profitable, margin is one of the main tools for pricing decisions and for spotting trouble early.
- Setting a target price — working backwards from a desired margin to the price that achieves it, rather than guessing a number and hoping the margin works out.
- Comparing product lines — a business selling several products can see which ones are quietly subsidising the others, even if every line looks fine on total revenue alone.
- Tracking trends over time — a shrinking margin on stable prices usually means rising costs are eating into profit before they show up anywhere else in the accounts.
- Benchmarking against competitors — a margin well below the industry norm can flag pricing that is too low, costs that are too high, or both.
Why margins vary so much between industries
There is no universal "good" margin, because industries differ enormously in how much capital, risk and volume sits behind each sale. A supermarket might run on a net margin in the low single digits and rely on enormous sales volume and fast inventory turnover to make that work, while a software company can post margins above 70% because, once written, code costs almost nothing extra to sell to the next customer. Comparing margins only really makes sense within the same industry, and ideally against a company’s own history.
What this assumes, and where it stops
Assumptions
- Cost means the cost you want measured against. Gross margin uses direct costs only; net margin uses all costs including overheads.
- Price is exclusive of sales tax or VAT. Including tax in the price inflates the apparent margin.
Limitations
- Does not allocate overheads, so it cannot tell you whether the business as a whole is profitable.
- Discounts, returns and payment processing fees reduce realised margin and are not included.
Common questions
What is the difference between margin and markup?
Both describe the same profit, measured against different bases. Margin divides profit by the selling price; markup divides it by the cost. A 50% markup is a 33.3% margin. If you set prices by adding a markup but report performance as margin, you will consistently miss your targets.
Why can’t I have a 100% margin?
Because margin is profit divided by price, reaching 100% would mean the cost is zero. As your target margin approaches 100%, the price required approaches infinity. Markup, by contrast, has no upper limit.
What is a good profit margin?
It is entirely industry-dependent. Grocery retail often runs on 1–3% net margin and survives on volume; software can exceed 80% gross margin. The useful comparison is against your own past figures and direct competitors, not a universal benchmark.
Sources
- Understanding your business finances — US Small Business Administration
Formula and content last reviewed on .
Results are estimates for information only, not professional advice.
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