How to Calculate Profit Margin: Formula, Examples and a Cheat Sheet
Profit margin is profit as a percentage of the selling price: (selling price − cost) ÷ selling price × 100. If you buy something for $10 and sell it for $15, your profit is $5 and your profit margin is $5 ÷ $15 × 100 = 33.3%.
That is the whole formula. The rest of this guide covers the cases where people get it wrong: the three kinds of margin, working backward from a target margin to a price, and what discounts and fees do to the number.
The profit margin formula
| Term | Formula |
|---|---|
| Profit | Selling price − cost |
| Profit margin (%) | Profit ÷ selling price × 100 |
| Markup (%) | Profit ÷ cost × 100 |
Worked example with made-up figures:
- Cost: $10
- Selling price: $15
- Profit: $15 − $10 = $5
- Margin: $5 ÷ $15 × 100 = 33.3%
- Markup: $5 ÷ $10 × 100 = 50%
Margin and markup describe the same $5 profit in two ways, and they are not the same number. If you use one when you mean the other, you will mis-price. Markup vs margin explains the difference in detail.
You can check any product in seconds with the free profit margin calculator. Enter cost and price, and it shows profit, margin and markup, and the price you need for a target margin.
Three kinds of profit margin
"Profit margin" can mean three different things, depending on which costs you subtract.
| Type | Subtracts | Formula |
|---|---|---|
| Gross margin | Cost of the goods sold | (Sales − COGS) ÷ Sales × 100 |
| Operating margin | COGS and running costs (rent, wages, utilities) | Operating profit ÷ Sales × 100 |
| Net margin | All costs, including interest and tax (the example below stops before tax) | Net profit ÷ Sales × 100 |
Using the month from how to calculate profit for a small business: sales $12,000, COGS $7,200, operating expenses $2,900, interest $100.
- Gross margin: ($12,000 − $7,200) ÷ $12,000 = 40%
- Operating margin: $1,900 ÷ $12,000 = 15.8%
- Net margin (before tax in this example): $1,800 ÷ $12,000 = 15%
When someone quotes a "margin", ask which one. A product-level price check uses gross margin. A health check on the whole business uses net margin. If the gap between sales and profit is still fuzzy, revenue vs profit explains it in plain terms.
How to calculate your margin step by step
- Find the real cost. The price on the supplier's invoice, plus anything you pay to get the item to your shelf (transport, import costs, packaging).
- Find the real selling price. What the customer actually paid, after any discount.
- Subtract cost from price to get profit.
- Divide profit by the selling price (not the cost).
- Multiply by 100.
A frequent mistake is dividing by cost. That gives markup, which looks larger and makes the business seem healthier than it is.
How to find the selling price for a target margin
This is the direction that matters most when you are setting prices.
Selling price = cost ÷ (1 − target margin)
Example: a product costs $10 and you want a 30% margin.
- Selling price = $10 ÷ (1 − 0.30) = $10 ÷ 0.70 = $14.29
- Check: profit is $4.29; $4.29 ÷ $14.29 = 30% ✓
Adding 30% to the cost instead gives $13.00, and the margin on $13.00 is $3 ÷ $13 = 23.1%, not 30%. That is the markup mistake in action.
Profit margin cheat sheet
Save or screenshot this. Figures are for a product that costs $10; the multiplier works for any cost.
| Target margin | Price multiplier (÷ by) | Selling price at $10 cost | Equivalent markup |
|---|---|---|---|
| 10% | 0.90 | $11.11 | 11.1% |
| 20% | 0.80 | $12.50 | 25% |
| 25% | 0.75 | $13.33 | 33.3% |
| 30% | 0.70 | $14.29 | 42.9% |
| 40% | 0.60 | $16.67 | 66.7% |
| 50% | 0.50 | $20.00 | 100% |
| 75% | 0.25 | $40.00 | 300% |
To use it: take your cost, divide by the multiplier, and you have the price. A 75% margin means the price is four times the cost.
Margin is not the whole picture: three things that shrink it
Discounts
A discount comes straight off your profit, not off your cost, so it cuts the margin faster than the discount percentage suggests.
Start with cost $10, price $15, profit $5, margin 33.3%.
| Discount | Price paid | Profit | Margin |
|---|---|---|---|
| None | $15.00 | $5.00 | 33.3% |
| 10% off | $13.50 | $3.50 | 25.9% |
| 20% off | $12.00 | $2.00 | 16.7% |
To earn the same total profit after a discount, you need to sell old profit per unit ÷ new profit per unit times as many units:
- 10% off: $5.00 ÷ $3.50 = 1.43 times the units (43% more sales)
- 20% off: $5.00 ÷ $2.00 = 2.5 times the units (150% more sales)
So at a 33.3% margin, a 20% discount does not need 20% more customers; it needs two and a half times as many. At a higher margin the multiple is smaller, at a lower margin it is larger. Check the margin before you discount, not after.
Payment and platform fees
If you pay a card or marketplace fee on each sale, it is a cost of the sale. As an example, a 3% fee on a $15 sale is $0.45. Profit falls from $5.00 to $4.55 and margin from 33.3% to 30.3%. Use your real fee. For online platforms, the marketplace seller profit calculator includes marketplace fees in the profit and the price you need.
Hidden costs of getting the goods
Transport, import charges, packaging, and breakage or expiry on part of each batch are all costs of the goods. If you leave them out, your margin on paper is higher than the real one. A quick test: take the total you paid for a batch including everything, and divide by the number of units you can actually sell after breakage or expiry, not the number you bought.
What is a good profit margin?
There is no single good number. It depends on what you sell, how fast it moves and what it costs to run your shop. Compare your own margin month to month, and by product group, then ask: after rent, wages and everything else, is anything left for me?
Two practical checks:
- Is your gross margin big enough to cover your running costs? If gross margin is 40% and running costs eat 38% of sales, you keep 2%. See how to calculate profit.
- Do your best sellers have a healthy margin? A product that sells a lot at a thin margin may earn less than a slower one at a better margin. Rank products by profit earned, not by units sold.
For turning margin into prices across your range, see how to price a product for profit.
How to see margin on every sale
Working out margin by hand for dozens of products is slow and easy to get wrong. If your tool stores a cost and a selling price for each product, it can show profit as you sell.
In Daily Sales Record each product has a cost and a selling price, so every sale gets a profit figure, and your reports show profit for the period, as bar, line or pie charts. The app can only calculate profit when costs are entered; if a product is sold with no recorded purchase cost the profit will look wrong or negative. You can also choose which cost the app uses for profit (last, maximum or average cost) in the Cost Settings of the Sales section.
Frequently asked questions
What is the profit margin formula?
Profit margin (%) = (selling price − cost) ÷ selling price × 100. For gross margin the cost is the cost of goods sold; for net margin it is all costs.
How do I calculate a 30% profit margin on a product?
Divide the cost by 0.70. A product that costs $10 needs to sell for $10 ÷ 0.70 = $14.29 to give a 30% margin. Adding 30% to the cost ($13) gives only a 23% margin.
What is the difference between margin and markup?
Margin divides profit by the selling price; markup divides profit by the cost. On any profitable sale the markup percentage is larger than the margin percentage. A $10 item sold for $15 has a 33.3% margin and a 50% markup.
What is a good profit margin for a small business?
It depends on the type of business, so compare your margin with your own past months and with your costs rather than a single number. Shops that sell fast-moving goods usually run lower margins on each item than shops selling slow-moving or custom goods. What matters is whether the margin covers your running costs and pays you.
Can a profit margin be negative?
Yes. If a product sells for less than it cost you, or your costs for the period are more than your sales, the margin is negative. A product with a margin that looks fine can still lose money once you add payment fees, delivery or discounts.
Final takeaway
Margin = profit ÷ selling price. To price for a margin, divide the cost by (1 − margin). Check what discounts and fees do before you agree to them, and look at margin by product, not only for the whole shop.
Use the free profit margin calculator for quick checks, and read markup vs margin if the two terms still blur.
Examples use made-up figures. This article is general information, not accounting or tax advice.