How to Calculate Profit Margin

The basic margin formula

Profit margin is profit expressed as a share of revenue. Work out the profit first, then divide by revenue and multiply by 100 to get a percentage.

• Profit = revenue − cost
• Margin = (profit ÷ revenue) × 100
• Example: you sell for 250 and it costs you 150. Profit is 100, so the margin is (100 ÷ 250) × 100 = 40%.

Gross, operating and net margin

Each margin stops at a different point on the way down the income statement, and each answers a different question.

Margin vs markup — the mistake that costs money

Markup divides profit by *cost*; margin divides profit by *price*. They are not interchangeable, and confusing them leads to under-pricing.

• Markup = (profit ÷ cost) × 100
• Margin = (profit ÷ price) × 100
• A 50% markup on a 100 cost gives a 150 price — which is only a 33.3% margin.

To convert: markup = margin ÷ (100 − margin) × 100. A 25% margin is a 33.3% markup.

Pricing to hit a target margin

Do not add a percentage to your cost if you want a specific margin — divide instead. To achieve a 40% margin on a 150 cost, divide by (1 − 0.40): 150 ÷ 0.6 = 250.

• Price = cost ÷ (1 − target margin)
• Always use landed cost: include freight, duty, packaging and payment fees.
• Check the margin after any planned discount, not before.

What counts as a good margin?

It depends entirely on the industry and on how fast you turn stock over. Grocery retail often operates on 2–5% net margins with high volume; software businesses can exceed 70% because the marginal cost of a sale is near zero.

Compare yourself with your own sector and your own history rather than with headlines from a different industry.