How to Calculate Profit Margin
Calculate gross profit margin, net profit margin, and markup percentages instantly with our free Profit Margin Calculator.
Steps
Enter your revenue (selling price)
Enter the total revenue or selling price. For a single product, this is the price you charge the customer. For a business period, this is total sales revenue.
Enter your cost
Enter the cost of goods sold (COGS) for gross margin, or total costs including operating expenses for net margin. COGS includes materials, direct labour, and manufacturing costs but not overhead.
View margin percentage
The gross margin is calculated as ((Revenue - COGS) / Revenue) × 100. A 40% gross margin means 40 cents of every dollar of revenue remains after covering direct costs. The markup percentage is also shown: ((Revenue - Cost) / Cost) × 100.
Try different scenarios
Adjust the cost and revenue values to see how pricing decisions affect margins. This is useful for pricing new products, evaluating supplier quotes, or modelling the impact of a price increase.
Using Profit Margin for Pricing Decisions
Knowing your target profit margin allows you to work backwards to set prices. If you need a 40% gross margin and your product costs £12 to produce, the minimum selling price is £12 / (1 - 0.40) = £20. This is different from simply adding 40% markup (£12 × 1.40 = £16.80), which yields only a 28.6% margin. Using the margin formula for pricing ensures you actually achieve your target profitability rather than inadvertently underprice your products. For service businesses where cost varies, calculate the margin after each job and trend over time to identify which types of work are most profitable.
Frequently Asked Questions
Profit margins vary enormously by industry. Software companies often achieve gross margins of 70–90%. Retailers typically see 20–40% gross margins. Restaurants operate on 3–9% net margins. Manufacturing is typically 5–20%. A 'good' margin is one that exceeds your industry average and covers all your costs while leaving enough to reinvest in growth. Compare your margins to industry benchmarks rather than absolute values.
Margin is profit as a percentage of selling price: (Profit ÷ Revenue) × 100. Markup is profit as a percentage of cost: (Profit ÷ Cost) × 100. A product that costs £10 and sells for £15 has a profit of £5. Margin = 5/15 = 33%. Markup = 5/10 = 50%. These are different numbers calculated from the same transaction. Margin is preferred in financial reporting; markup is used in pricing calculations.
Gross profit margin only deducts the direct cost of goods sold (materials, direct labour) from revenue. Net profit margin deducts all costs: COGS plus operating expenses (rent, salaries, utilities, marketing), interest, and taxes. Gross margin shows how efficiently you produce your product; net margin shows overall business profitability after all expenses.