How to calculate profit margin
Margin expresses profit as a share of revenue:
margin = ((revenue − cost) ÷ revenue) × 100
Selling for 250 something that cost 175 gives a profit of 75, and 75 ÷ 250 = 30% margin. Because the denominator is revenue, margin can never reach 100% — that would mean the item cost nothing.
Gross, operating and net margin
The formula is the same at every level; only what counts as "cost" changes. Gross margin subtracts the direct cost of goods. Operating margin also subtracts salaries, rent and other running costs. Net margin subtracts everything, including tax and interest. Comparing a gross margin against a competitor's net margin is a meaningless comparison.
Margin is not markup
Markup measures the same profit against cost rather than revenue:
markup = ((revenue − cost) ÷ cost) × 100
The same 175 cost and 250 price is a 30% margin but a 42.9% markup. Quoting one when you mean the other is a reliable way to underprice, and the gap widens as the numbers grow.
| Markup | Equivalent margin | Price multiplier on cost |
|---|---|---|
| 10% | 9.1% | 1.10 |
| 25% | 20.0% | 1.25 |
| 33.3% | 25.0% | 1.33 |
| 50% | 33.3% | 1.50 |
| 100% | 50.0% | 2.00 |
| 200% | 66.7% | 3.00 |
To convert between them: margin = markup ÷ (100 + markup) × 100.
Frequently Asked Questions
- What is the difference between margin and markup?
- Margin divides profit by revenue; markup divides the same profit by cost. A 50% markup is only a 33.3% margin.
- Can a profit margin be over 100%?
- No. Since profit is always less than revenue for a profitable sale, margin approaches but never reaches 100%. Markup has no upper limit.
- What is a good profit margin?
- It depends entirely on the industry. Grocery retail runs on low single digits, while software can exceed 70%. Compare against peers, not against an absolute number.