Profit margin formula (and the two mistakes people make)

Profit margin is one of those numbers that sounds simple, but it’s also one of the easiest metrics to misunderstand — especially when people mix up margin and markup. This page is designed to make it painfully clear, with formulas, worked examples, and reverse calculations you can use for pricing decisions.

First, let’s define the core pieces. You have revenue (also called selling price or sales), and you have cost (the money it takes to produce, buy, or deliver what you sold). The basic relationship is:

Profit = Revenue − Cost That’s the money you keep before you account for other expenses like rent, ads, salaries, returns, and taxes. In many product contexts, the “cost” you plug in is your COGS (cost of goods sold). For a service business, it might be your direct labor and delivery costs.

Now, the most common “profit margin formula” (often called gross profit margin when cost means COGS) is:

Profit Margin % = (Profit ÷ Revenue) × 100 This tells you: “For every $1 of revenue, how many cents are profit?” If your margin is 25%, then you keep $0.25 from every $1 you collect (again, before other costs you haven’t included).

The second metric people confuse with margin is markup:

Markup % = (Profit ÷ Cost) × 100 Markup answers a different question: “How much did I increase the price relative to my cost?” Notice the denominator is cost, not revenue.

• Mistake #1: Treating markup like margin. Example: Someone says “I want 50% margin” and prices using a 50% markup instead. They end up with only a 33.33% margin (not 50%).
• Mistake #2: Forgetting hidden costs. Fees, shipping, discounts, refunds, damaged inventory, and ad spend can turn a “good” margin into a loss. If you want a realistic margin, include realistic costs.

If you only remember one mental shortcut, remember this: markup is always higher than margin for the same revenue/cost pair (unless profit is zero). Why? Because cost is smaller than revenue, so dividing by cost produces a bigger percentage. That’s why marketplaces that quote markups can feel “inflated” compared to businesses that report margin.

That difference is why this calculator intentionally shows both — so you can speak the same “pricing language” as suppliers, wholesalers, clients, and finance teams.

Sometimes you’ll see net profit margin. Net margin uses net profit, meaning profit after all expenses (rent, payroll, software, taxes, interest, etc.): Net Margin % = (Net Profit ÷ Revenue) × 100. This calculator focuses on the clean “revenue and cost” math, but you can adapt it by treating “cost” as your total expenses for the period.

What the calculator is doing (step-by-step)

The calculator supports four modes because real-world questions are rarely just “what’s my margin?” Pricing and business planning often start with a goal (“I want a 35% margin”), then you work backwards.

1) Compute profit = revenue − cost.
2) Compute margin = profit ÷ revenue.
3) Convert to percent: margin × 100.
If revenue is 0, margin is undefined — the calculator blocks that input.

This is simply profit = revenue − cost. It also calculates margin and markup automatically to give context.

Here’s the reverse formula most people need for pricing: Start with margin = (revenue − cost) ÷ revenue. Solve for revenue and you get: Revenue = Cost ÷ (1 − Margin) where Margin is the target margin as a decimal (e.g., 35% → 0.35).

Example: Cost = $75, target margin = 35% → revenue = 75 ÷ (1 − 0.35) = 75 ÷ 0.65 ≈ $115.38. If you charge $115.38, your profit is $40.38 and your margin is 35%.

This answers: “Given my selling price, what is the maximum cost I can afford if I want a certain margin?” Rearranging the margin equation gives: Cost = Revenue × (1 − Margin) Example: Revenue = $200, target margin = 25% → max cost = 200 × 0.75 = $150. If your cost goes above $150, you won’t hit 25% margin.

The colored meter is a quick visual cue, not a rule. “Good” margins depend on your industry, your volume, your competition, and your overhead. A grocery store might run single-digit margins and still be healthy, while a digital product might target 80%+ because marginal costs are low. Use the meter like a speedometer: it helps you notice whether you’re moving “slow” or “fast,” but you still decide where you want to go.

• Include fees: payment processing, marketplace fees, shipping labels, packaging.
• Include discounts: a 10% coupon directly reduces revenue (and margin).
• Plan for returns: returns can turn “profit” into a loss if you absorb shipping.
• Separate overhead: if you want net margin, include rent/payroll/ads too.
• Test scenarios: save multiple scenarios (different costs or prices) and compare.

Worked profit margin examples (with interpretation)

You sell a product for $120. Your total cost to fulfill is $75. Profit = 120 − 75 = $45. Margin = 45 ÷ 120 = 0.375 → 37.5%. Markup = 45 ÷ 75 = 0.60 → 60%.

Interpretation: A ~38% gross margin is often considered “healthy” for many small ecommerce brands, but whether it’s enough depends on your ad spend and overhead. If you spend $20 on ads to acquire a customer, your effective profit might drop to $25, which would change your margin if you treat ads as part of cost.

You charge $500 for a service. Direct labor + materials cost $280. Profit = 220. Margin = 220 ÷ 500 = 44%. Markup = 220 ÷ 280 ≈ 78.6%.

Interpretation: This looks strong — but if you spend 2 hours driving and 3 hours on admin work that isn’t in “direct cost,” your true cost is higher. Track the “invisible” time if you want realistic margins.

Your cost is $40 and you want a 30% margin. Price = 40 ÷ (1 − 0.30) = 40 ÷ 0.70 ≈ $57.14. Profit would be $17.14.

Interpretation: If you priced at $52 instead, your margin is (52−40)/52 ≈ 23.1%. Reverse formulas are the fastest way to see whether your target is realistic at market prices.

You sell at $250 and want a 20% margin. Max cost = 250 × (1 − 0.20) = 250 × 0.80 = $200.

Interpretation: If your supplier raises costs to $210, your margin becomes (250−210)/250 = 16%. This is how you can sanity-check supplier negotiations quickly.

Profit margin formula FAQs

• What is a “good” profit margin?

  It depends on industry and business model. Some industries operate on thin margins (like groceries), while software and digital products can have very high margins. Use this calculator to compare scenarios, then decide based on your overhead, growth goals, and competitive pricing.

• Is profit margin the same as gross margin?

  Often, yes — when “cost” means COGS. Gross margin typically uses revenue and cost of goods sold. Net margin uses net profit after all expenses. Same structure, different definition of “profit.”

• Why is my margin lower when I run discounts?

  Discounts reduce revenue while costs often stay the same. Since margin divides by revenue, a smaller denominator and smaller profit can quickly compress margin. Try entering your discounted selling price as revenue to see the impact.

• What’s the fastest way to price a product for a target margin?

  Use the reverse formula: Revenue = Cost ÷ (1 − Margin). In this calculator, choose “Revenue (from Cost & Target Margin).” It instantly gives you the selling price needed to hit your goal.

• Why can’t I calculate margin if revenue is 0?

  Because margin uses revenue in the denominator. Dividing by 0 is undefined. If revenue is 0, you haven’t made a sale — and “profit margin” doesn’t apply.

• Should I include shipping and marketplace fees as cost?

  If you want a realistic picture, yes. A clean “COGS only” margin can be helpful for comparing suppliers, but for pricing decisions you typically include fees, shipping, packaging, and expected refunds.

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