What is profit margin?
Profit margin is the percentage of revenue that remains as profit after deducting the cost of goods sold. It expresses profitability relative to the selling price. A 33% profit margin means that for every $100 in revenue, $33 is profit. Margin is always expressed as a percentage of the selling price.
What is markup and how does it differ from margin?
Markup is the percentage added on top of the cost price to arrive at the selling price. While margin is calculated as a percentage of revenue, markup is calculated as a percentage of cost. For example, a $100 item with a 50% markup sells for $150, giving a 33.3% margin. The two are related but not interchangeable — confusing them is a common and costly business mistake.
How to calculate profit margin and markup?
The core formulas are:
- Profit = Selling price − Cost
- Margin (%) = (Profit ÷ Selling price) × 100
- Markup (%) = (Profit ÷ Cost) × 100
- Selling price from margin = Cost ÷ (1 − Margin / 100)
- Selling price from markup = Cost × (1 + Markup / 100)
What are some profit margin calculation examples?
Example 1 — Cost and selling price: A product costs $60 to produce and sells for $100. Profit = $40. Margin = 40 / 100 × 100 = 40%. Markup = 40 / 60 × 100 = 66.67%.
Example 2 — Target margin: A product costs $80 and you want a 25% margin. Selling price = 80 / (1 − 0.25) = $106.67. Markup = 26.67 / 80 × 100 = 33.33%.
Example 3 — Target markup: A product costs $50 and you apply a 40% markup. Selling price = 50 × 1.4 = $70. Margin = 20 / 70 × 100 = 28.57%.
When to use margin vs markup?
Use margin when thinking in terms of revenue — it is the standard metric in financial reporting, retail, and pricing analysis. Use markup when setting prices from cost, as it directly tells you how much you are adding to what you paid. Retailers typically target margins (e.g. 40–60%), while manufacturers often apply markup rates to their production costs.
What is the difference between gross and net profit margin?
Gross profit margin deducts only the direct cost of goods sold (COGS) from revenue. Net profit margin deducts all expenses — COGS, operating costs, interest, and taxes. A business with $100 revenue, $40 COGS, and $30 in other expenses has a gross margin of 60% but a net margin of 30%. This calculator computes gross margin, which is most useful for pricing decisions and product-level profitability. Net margin is the better metric for assessing overall business health.
What is a good profit margin?
A "good" margin depends heavily on the industry. Grocery retail operates on margins as low as 2–5%, while software products can achieve 70–90%. For small businesses, a gross margin of 40–60% is often considered healthy. The key is covering operating expenses while remaining competitive in your market. When calculating prices inclusive of discounts, combine this with our discount calculator so that promotional pricing is factored into the margin analysis. Profits retained in a business can be reinvested — the compound growth calculator illustrates how those reinvested returns compound over time.