How to Calculate Profit Margin (Formula and Examples)
4 min read
Profit margin tells you how much of every dollar of sales you actually keep. It's the number that separates a busy business from a profitable one — and it's easy to calculate once you know which margin you mean.
Here is how to calculate profit margin, with the formulas and the one mistake that trips people up.
Step by step
- 1Gross profit margin
Subtract the cost of goods sold (COGS) from revenue, divide by revenue, multiply by 100. Selling for 100 with 60 in costs is (100 - 60) / 100 x 100 = 40% gross margin.
- 2Net profit margin
Use net profit (after all expenses — overhead, salaries, tax) instead of gross profit: net profit / revenue x 100. This is the bottom-line margin that actually shows what you keep.
- 3Avoid the markup-vs-margin trap
Markup is profit over COST; margin is profit over PRICE. A 50% markup on a 60 cost is a 90 price — but that's only a 33% margin, not 50%. Confusing them is how businesses underprice.
- 4Use the calculator
Enter your revenue and costs in the Profit Margin Calculator to get gross and net margin instantly, and to price by a target margin.
Tips
- Healthy margins vary wildly by industry — software runs 70%+, grocery often under 5% — so compare to your sector, not a generic number.
- To hit a target margin, price = cost / (1 - margin). For a 40% margin on a 60 cost: 60 / 0.60 = 100.
- Track margin over time, not just once — rising costs quietly erode it.
Frequently asked questions
What is the profit margin formula?
Profit margin = profit / revenue x 100. Use gross profit (revenue minus COGS) for gross margin, or net profit (after all expenses) for net margin.
What is the difference between markup and margin?
Markup is profit as a percentage of cost; margin is profit as a percentage of selling price. The same dollar profit gives a higher markup % than margin %.
How do I price for a target margin?
Divide your cost by (1 minus the target margin as a decimal). A 60 cost at a 40% target margin prices at 60 / 0.60 = 100.