Margin calculator (how to calculate profit margin)

How much of your business’s revenue do you retain as profit?

If you raised prices or cut costs, how would these adjustments affect your margin?

And do you know how your margin compares to your markup?

Whether you’ve been in business for years or you’re setting your first pricing strategy, you need to know how to calculate profit margin.

While the formula is straightforward, margin has many nuances.

For your reference, we provide a margin calculator that can do the math for you, or help you to check your own calculations when figuring out your pricing and costs.

In this article, we’ll also cover the essentials of margin, including the differences between gross and net margin, and how margin relates to markup, so you can analyze productivity more effectively.

By the end, you’ll understand how to calculate gross margin so you can confidently set prices that cover production costs while providing the profit your business needs to succeed.

Note that this article talks about gross margin unless otherwise stated.

Here’s what we’ll cover

Margin calculator

You can use this gross margin calculator to evaluate your own business or the competition.

Here are a few ways to use this tool:

• Determine profit margin across the business or for a specific product or service.
• Set new prices for your products or services.
• Calculate what a product or service should cost to stay competitive while maintaining a certain margin.
• Analyze competitors’ profit margins based on your knowledge of their selling price and cost price.

To calculate margin, input selling price and cost price.

Press “calculate” to see the margin expressed as a percentage. Toggle through the buttons at the top to calculate selling price or cost price instead.

What is margin?

Margin represents profit as a percentage of an item’s selling price.

Also known as gross margin, it reflects the percentage of revenue that remains after accounting for the cost of the item (i.e., labour and materials).

It’s the ‘margin’ of difference between the price it costs to make an item and the price it’s sold for.

You calculate margin by subtracting the cost of goods sold (COGS) from the selling price.

Then, you divide the result by the selling price and multiply by 100 to get the profit percentage.

Margin formula

Margin = ((Selling Price – Cost Price) / Selling Price) x 100

For example, suppose you sell a product for $100.

If it costs $60 to produce, your margin would be:

Margin = ((100 – 60 / 100) × 100) = 40%

This means 40% of the selling price is profit, while 60% represents the production cost.

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How to calculate selling price using margin

Do you want to know how to set the selling price to achieve a certain profit margin?

This can be useful when you know the industry standard margin and want to set your prices accordingly.

If you know the margin and the cost, you can easily calculate the selling price.

Rework the gross margin calculation above into this formula:

Selling Price = Cost / (1 – Margin)

For example, suppose your goal is a margin of 25%, if the item costs you $150 to produce, your selling price should be:

Selling Price = 150 / (1 – 0.25) = $200

How to calculate cost price from selling price and margin

Do you need to know how much your COGS should be so you can reach a certain margin?

This can be useful when doing competitor research and helps you to remain competitive in the market.

With this formula, you can quickly determine your cost price:

Cost Price = (1 – Margin) x Selling Price

For example, suppose your selling price is $500, if you want your margin to be 30%, your cost price should be:

Cost Price = (1 – 0.3) x 500 = $350

What’s the difference between gross profit margin and net profit margin?

This article has been discussing ‘gross margin’, but you might also encounter the term ‘net profit margin’ and get confused or think they are the same thing.

These metrics are different and it’s important not to get them mixed up.

It’s also very important to use the right terminology when talking to your customers or suppliers.

Gross profit margin accounts for COGS only, which reflects direct costs.

However, this metric can only tell you so much about your company’s profitability.

Net profit margin also accounts for indirect costs, which reflect business expenses.

This metric factors in direct costs like labour and materials plus indirect costs like taxes, interest, and operating expenses.

Let’s compare the two metrics side by side.

Gross profit margin	Net profit margin
Gross profit expressed as a percentage of the selling price.	Net profit expressed as a percentage of revenue.
Factors in COGS only.	Factors in COGS and expenses.
Gross profit margin = ((Selling price − Cost price) / Selling price) × 100	Net profit margin = ((Revenue – COGS – Operating expenses – Interest – Taxes) / Revenue) x 100
If the selling price is $100 and the cost price is $25, the gross profit margin is 75%.	If a company has quarterly revenue of $100,000 with COGS of $25,000 and expenses of $25,000, the net profit margin is 50%.
Helps you understand how production costs affect your profit margin.	Helps you understand your organization’s financial health and assess profitability.
Doesn’t show how overhead costs or business expenses affect your margin.	Doesn’t offer insight into production costs and may show skewed results based on one-time transactions.

Should I use gross profit or net profit?

Both profit margin metrics help you understand your profit percentage.

But, because they use distinct inputs and reveal different insights, each has specific use cases.

When to use gross profit margin

Use gross profit margin when you need to know how production costs affect your margin.

A gross profit margin calculator can tell you how much you should reduce COGS to increase your margin to a certain level.

This metric is also helpful for setting your pricing strategy.

Gross profit margin tells you how to price an item to achieve a certain profit percentage.

When to use net profit margin

Use net profit margin when you need a more complete look at your company’s financial health.

With this metric, you can monitor profit-related trends and forecast profits for future time periods.

Typically, you have to share your net profit margin when applying for financing.

It’s one of several figures lenders use to determine profitability and assess cash flow.

What is the difference between margin and markup?

It’s also essential to know the difference between two other metrics.

It’s easy to confuse margin and markup as they are used interchangeably in trade and industry, but if you get these mixed up, you could cause real problems in your pricing strategy and make a loss.

Margin and markup both use the same inputs (selling price and cost price) as a way to analyze profitability.

However, the calculations and insights are completely different.

To set appropriate pricing and stay profitable, you have to understand how margin and markup differ.

Let’s compare them side by side.

Margin	Markup
The percentage of the selling price that is profit.	The percentage added to the cost price to arrive at the selling price.
Margin = ((Selling Price – Cost Price) / Selling Price) × 100	Markup = ((Selling Price – Cost Price) / Cost Price) × 100
Calculated based on the selling price.	Calculated based on the cost price.
If a product costs $60 and sells for $100, the margin is 40%.	If a product costs $60 and sells for $100, the markup is 66.67%.
Helps understand the profitability of sales.	Helps determine the selling price needed to achieve desired profits.

Markup vs. margin calculation example

Suppose you own a flower shop and you want to set the selling price for a custom bouquet.

You know the cost to create the bouquet is $10 and a markup of 60% would give you a competitive advantage.

You can calculate selling price using this markup formula:

Selling Price = $10 + ($10 x 60%) = $16

Here’s another way to calculate selling price based on markup:

• Your cost price = $10
• You want a markup of 60% = $6
• Add the markup to the cost price to determine the selling price = $16

Now suppose you want a 60% margin.

Here’s how to calculate selling price based on margin:

Selling Price = $10 / (1 – 0.6) = $25

A 60% margin on a bouquet costing $10 would require a selling price of $25.

A 60% margin results in a higher selling price ($25) compared to a 60% markup on the same bouquet ($16).

As you can see, understanding the difference between margin and markup is essential for setting a selling price that aligns with your goals.

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When should I use margin and when should I use markup?

Markup uses cost as a base input. It’s most useful for setting initial selling prices.

Consider markup when calculating how much to increase the selling price from the cost price.

Use it to ensure you price items competitively in your industry or region.

Margin is based on selling price or revenue.

It’s useful for calculating short- and long-term profitability.

Consider margin when you need to calculate profitability for a certain item or for the business as a whole.

It also factors into financial reporting since it plays a role in profit and loss statements.

What do I need to consider when I calculate margin?

When determining margin, keep these factors in mind:

1. Selling price

Confirm the market will support the selling price.

Competitor pricing and customer perception are 2 factors that affect whether customers will pay the price.

2. COGS

Economic conditions and market trends may change the cost of labour or materials over time.

Monitor your COGS so you can take action if necessary.

For example, if your COGS increases, you would need to either reduce your costs, or increase your selling price to maintain the same margin.

3. Growth stage

The age or growth stage of the business may affect the margin.

For example, new businesses often experience lower profit margins than established companies.

In the early days, businesses tend to have fewer customers and limited opportunities to earn revenue.

Over time, they move towards operating more efficiently, leading to a higher profit margin.

4. Industry standards

Profit margins aren’t consistent from industry to industry.

To determine whether your margin is good or sustainable, review industry-specific data.

The importance of margin and how it’s used in business

Margin provides many important business insights.

Calculate this metric to:

• Set or revisit your pricing strategy: Use the margin formula to calculate your margin at various price points.
• Decide when to cut costs: If your margin decreases, you can determine how much to cut expenses or labour costs.
• Analyze profitability of units or time periods: Use the margin formula to measure profit percentage for either individual items or the entire business during a specific timeframe.
• Measure your company’s financial health: A positive margin confirms you’re generating a profit, while a negative margin indicates your costs are higher than your revenue.
• Assess operational efficiency: A higher margin reflects greater efficiency and a higher ratio of revenue to cost.

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FAQs

Gross margin vs. gross profit vs. operating profit

Gross margin, gross profit, and operating profit are all business terms that refer to profitability.

However, each one reveals different information and applies to specific contexts.

Gross Margin	Gross Profit	Operating Profit
Percentage	Dollar amount	Dollar amount
Profit as a percentage of selling price	Profit after accounting for COGS	Profit after accounting for operating expenses, COGS, depreciation, and amortization
Gross Margin = ((Selling Price – Cost Price) / Cost Price) x 100	Gross Profit = Revenue – COGS	Operating Profit = Revenue – COGS – Operating Expenses – (Depreciation + Amortization)
Applies to specific products and services or to the entire business	Applies to specific products and services or to the entire business	Applies to core business operations
Helpful for setting prices and assessing profitability over time	Helpful for measuring profitability without overhead or fixed expenses	Helpful for calculating earnings before interest and tax (EBIT)

What is a good margin?

The definition of a good profit margin depends on factors like the industry, the company, and your own business strategy.

Do you want to pitch at an economy volume market selling a lot of products cheaply?

Or, are you a luxury goods business aiming for a high margin to cover the time invested into making every item and the limited accessible market?

If you are in a new industry or trialling new products, the sweet spot for margin would be between items selling too fast (because they are too cheap, or lack of competition) and selling too slow (too expensive or a saturated market).

You would have to test to find your balance between demand for product and availability of other products.

How do I calculate markup from margin?

You can convert margin into markup with this formula:

Markup = Margin / (1 – Margin) x 100

For example, suppose your margin is 60%. Your markup would be 150%:

Markup = 0.6 / (1 – 0.6) x 100 = 150%

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Once you understand how to calculate margin and how it differs from markup, you can easily make choices about pricing your products.

Use our margin calculator to run the numbers for you, or use it to check your own calculations and give you confidence in your numbers.

For help with your cash management and billing, we offer a cloud-based business planning solution that makes it easier for you to make informed decisions for growth.

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