How to calculate profit margin
Profit margin is the share of each sale you keep as profit, expressed as a percentage of revenue. Where markup looks at profit against your cost, margin looks at profit against your price — which is why margin is the figure investors, lenders, and accountants usually care about.
The formula is:
Gross profit = Revenue − Cost
Profit margin = Gross profit ÷ Revenue × 100Sell something for $150 that costs you $100, and you keep $50 — a 33.3% margin. The calculator above also shows the equivalent markup (50%) so you can quote in whichever your industry uses.
A worked example
Imagine you sell a handmade desk for $800. Your wood, hardware, finish, and shop time come to $500:
- Revenue: $800
- Cost: $500
- Gross profit: $800 − $500 = $300
- Profit margin: $300 ÷ $800 = 37.5%
That 37.5% is your gross margin — what's left after the direct cost of the desk, but before rent, marketing, and tax. Your net margin will be lower once those are paid.
Gross, operating, and net margin
"Profit margin" can mean three different things depending on which costs you subtract. They stack like layers:
| Margin | What it subtracts |
|---|---|
| Gross margin | Direct cost of the goods or service sold |
| Operating margin | Gross cost + overhead (rent, salaries, tools) |
| Net margin | All of the above + interest and tax |
This calculator works out gross margin from a single price and cost. For your whole business, add up total revenue and total costs over a period and use the same formula.
Pricing to hit a target margin
Working backwards from a margin you want is one of the most useful pricing moves — and the place people most often get the arithmetic wrong. You divide by one minus the margin; you don't multiply:
Selling price = Cost ÷ (1 − Target margin% ÷ 100)For a 40% margin on a $60 cost: $60 ÷ 0.60 = $100. Charging $60 × 1.40 = $84 instead would only give you a 28.6% margin — a common and costly slip.
Frequently asked questions
What's the difference between margin and markup?
Same profit, different base. Margin divides profit by the selling price; markup divides it by the cost. Margin is always the smaller percentage. Our markup calculator handles the cost-to-price direction.
Can profit margin be over 100%?
Gross margin cannot — at best you keep 100% of revenue when cost is zero. Markup, however, can run well over 100%, which is why the two numbers diverge so much at the high end.
Should margin include tax?
Sales tax and VAT are collected on behalf of the government and aren't your revenue, so leave them out of margin math. Income tax is only subtracted at the net-margin layer. Use the sales tax calculator to handle tax separately.
Happy with the price? Generate a clean invoice for it with the free invoice generator, or read how to write a quote for the rest of the pricing conversation.