Profit margin is profit divided by revenue, multiplied by 100: (revenue − costs) ÷ revenue × 100. A shop that sells $12,500 of goods and keeps $4,400 after all expenses has a net profit margin of 4,400 ÷ 12,500 = 35.2%. Which costs are subtracted decides whether the result is a gross, operating or net margin.
This guide shows each formula in order, works one business through all three margins, explains why margin and markup are different numbers, and gives a lookup table for converting between them.
What is the profit margin formula?
The general formula is the same every time; only the profit figure changes:
Profit margin (%) = profit ÷ revenue × 100
Revenue is the money from sales. The SEC's beginner guide to financial statements calls the top line "gross revenues or sales" and notes that discounts and returns can be subtracted to reach net revenue. Use whichever revenue figure you are consistent about, normally net sales after returns and discounts.
Three margins are used most often, each stopping at a different line of the income statement:
| Margin | Profit used | Formula |
|---|---|---|
| Gross margin | Gross profit = sales − cost of goods sold | (Sales − COGS) ÷ Sales |
| Operating margin | Sales − COGS − other operating expenses | (Sales − COGS − operating expenses) ÷ Sales |
| Net profit margin | Net income: everything deducted, including interest and tax | Net income ÷ Sales |
The three formulas match those in Harvard Business School Online's overview of margin ratios.
How do you calculate gross, operating and net margin? A worked example
A small online shop has these figures for one month:
- Sales: $12,500
- Cost of goods sold (products, packaging, shipping in): $4,500
- Operating expenses (rent, software, ads, wages): $3,600
- Interest: $400
- Income tax: $1,000
Step 1: gross profit and gross margin
Gross profit = $12,500 − $4,500 = $8,000. Gross margin = 8,000 ÷ 12,500 × 100 = 64.0%.
Step 2: operating profit and operating margin
Operating profit = $8,000 − $3,600 = $4,400. Operating margin = 4,400 ÷ 12,500 × 100 = 35.2%.
Step 3: net income and net margin
Net income = $4,400 − $400 − $1,000 = $3,000. Net margin = 3,000 ÷ 12,500 × 100 = 24.0%.
The same business has a 64.0%, a 35.2% and a 24.0% margin, depending on where the subtraction stops. When someone quotes a "profit margin", ask which one. If the cost lines are not known, the profit calculator takes units, price, unit cost and fixed costs and returns profit, margin and break-even in one step.
Percent of a number and percent change use the same division; the percentage guide covers the basics.
What is the difference between profit margin and markup?
Both express the same profit, but against a different base:
- Margin = profit ÷ selling price × 100
- Markup = profit ÷ cost × 100
For the shop above, the $8,000 gross profit is 64.0% of the $12,500 in sales but 8,000 ÷ 4,500 = 177.8% of the cost of goods. Same money, two percentages.
Penn State Extension illustrates the trap with a $1.00 item marked up 30% to $1.30. The profit is $0.30, but dividing it by the $1.30 price gives a margin of only 23%. Adding a 30% markup therefore never produces a 30% margin.
Because a margin is a share of the price, it cannot reach 100%: that would mean the item cost nothing. A markup has no ceiling, since profit can be many times the cost.
Markup to margin conversion table
The conversion is exact: margin = markup ÷ (100 + markup) × 100 and markup = margin ÷ (100 − margin) × 100.
| Markup | Margin | Margin | Markup | |
|---|---|---|---|---|
| 10% | 9.09% | 10% | 11.11% | |
| 25% | 20.00% | 20% | 25.00% | |
| 30% | 23.08% | 30% | 42.86% | |
| 50% | 33.33% | 40% | 66.67% | |
| 75% | 42.86% | 50% | 100.00% | |
| 100% | 50.00% | 60% | 150.00% | |
| 150% | 60.00% | 70% | 233.33% | |
| 200% | 66.67% | 75% | 300.00% |
The markup calculator converts any pair of cost, price, markup and margin.
How do you set a price for a target margin?
Divide the cost by one minus the margin: price = cost ÷ (1 − margin).
- Cost $60, target margin 40%: price = 60 ÷ 0.60 = $100. Check: profit $40 ÷ $100 = 40%.
- The University of New Hampshire Extension gives the same comparison for a $2.50 wholesale item: a 40% margin needs $2.50 ÷ 0.60 = $4.17, whereas a 40% markup ($2.50 × 1.40) gives only $3.50.
The second price looks right to people who confuse the two measures, and it quietly leaves the margin at 28.57% instead of 40%.
How do discounts change profit margin?
A discount lowers the price but not the cost, so the margin falls faster than the discount. An item costing $60 and sold for $100 has a 40% margin. At 10% off the price is $90, profit is $30 and the margin is 30 ÷ 90 = 33.3%. Profit per item dropped by 25%, from $40 to $30. The discount calculator shows the sale price and savings.
What happens to the margin when the price goes up?
Raising the price lifts the margin faster than the price itself, as long as cost stays the same. The $60 item sold at $100 has a 40% margin. At $110 the profit is $50 and the margin is 50 ÷ 110 = 45.45%, even though the price rose only 10%. The same arithmetic explains why a cost increase hurts: if the cost of that $100 item rises from $60 to $66 (up 10%), the margin falls from 40% to 34 ÷ 100 = 34%. Tracking the margin month by month shows which of the two moved.
What are common profit margin mistakes?
- Mixing up margin and markup. Check which base a quoted percentage uses before comparing it.
- Comparing different margins. A 64% gross margin and a 24% net margin can describe the same business.
- Leaving out costs. Shipping, payment fees, returns and software count as costs. A margin that ignores them is overstated.
- Using a margin to estimate break-even. Break-even depends on fixed costs and the profit per unit, not on the percentage alone: with $3,600 of fixed costs and $16 of profit per unit ($25 price − $9 cost), a business needs 3,600 ÷ 16 = 225 units.
- Comparing across industries. Cost structures differ, so a "good" margin is relative to similar businesses and to the same business over time.
Frequently asked questions
What is a good profit margin?
No single number applies to every business. Compare the margin with companies of a similar type and size, and watch the trend. A margin that rises as sales grow usually means costs are under control.
Should I use gross or net margin?
Use gross margin to judge pricing and product costs, and net margin to judge whether the whole business makes money after every expense.
Educational only, not financial or tax advice.