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.
Worked through one small business with £400,000 of revenue:
| Line | Amount | Margin | What it tells you |
|---|---|---|---|
| Revenue | £400,000 | — | The top line |
| Cost of goods sold | £240,000 | — | Direct cost of what was sold |
| Gross profit | £160,000 | 40.0% | Whether the product itself pays |
| Operating costs | £108,000 | — | Salaries, rent, software, marketing |
| Operating profit | £52,000 | 13.0% | Whether the business as run pays |
| Interest and tax | £18,000 | — | Financing and the tax bill |
| Net profit | £34,000 | 8.5% | What is actually left |
The three margins answer different questions, and a business can look healthy on one and fail on another. A 40% gross margin with an 8.5% net margin means the product works but the overhead is heavy; the fix is in the operating costs, not in the pricing.
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 |
| 15% | 13.0% | 1.15 |
| 20% | 16.7% | 1.20 |
| 25% | 20.0% | 1.25 |
| 30% | 23.1% | 1.30 |
| 33.3% | 25.0% | 1.33 |
| 40% | 28.6% | 1.40 |
| 50% | 33.3% | 1.50 |
| 60% | 37.5% | 1.60 |
| 75% | 42.9% | 1.75 |
| 100% | 50.0% | 2.00 |
| 150% | 60.0% | 2.50 |
| 200% | 66.7% | 3.00 |
| 400% | 80.0% | 5.00 |
To convert between them:
margin = markup ÷ (100 + markup) × 100
markup = margin ÷ (100 − margin) × 100
A business that believes it is making a 50% margin while actually applying a 50% markup is making 33.3%. On thin overheads that difference is the whole profit.
Pricing from a target margin
The question that matters when setting a price is the reverse one: you know the cost and the margin you need, and you want the price.
price = cost ÷ (1 − margin ÷ 100)
To make a 35% margin on an item costing £52: 52 ÷ 0.65 = £80. The instinct to add 35% to the cost gives £70.20, which is only a 25.9% margin — a shortfall of nearly £10 a unit.
The division form also shows why high margins get expensive fast. Each additional margin point multiplies the price by a larger factor, because the denominator is shrinking:
| Target margin | Divide cost by | Price on a £52 cost |
|---|---|---|
| 20% | 0.80 | £65.00 |
| 30% | 0.70 | £74.29 |
| 40% | 0.60 | £86.67 |
| 50% | 0.50 | £104.00 |
| 60% | 0.40 | £130.00 |
| 70% | 0.30 | £173.33 |
| 80% | 0.20 | £260.00 |
| 90% | 0.10 | £520.00 |
Going from a 20% to a 40% margin doubles the profit per unit but only raises the price by a third. Going from 80% to 90% doubles the price. This is why software, where the marginal cost is close to zero, can carry margins that would be impossible in retail — and why a retailer chasing a software-like margin ends up with an unsellable price.
What a discount does to margin
A discount comes straight out of the margin, not out of the price proportionally. An item costing £60 sold at £100 carries a 40% margin. Discount it 10% to £90 and the profit drops from £40 to £30 — a 25% cut in profit for a 10% cut in price. The rule of thumb is that the profit falls by the discount divided by the margin, so the thinner the margin, the more damage a small discount does.
How to calculate a profit margin
- Enter the profit. Type revenue minus cost into the first field.
- Enter the revenue. Type the total revenue into the second field.
- Read the margin. The result is the profit margin as a percentage of revenue.
- Convert to markup if needed. Divide the margin by (100 minus the margin) and multiply by 100 to get the markup on cost.
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.
- How do I price something to hit a 40% margin?
- Divide the cost by 0.60. An item costing £30 needs to sell at £50. Adding 40% to the cost gives £42, which is only a 28.6% margin.
- How much profit does a 10% discount cost me?
- Roughly the discount divided by the margin. On a 40% margin a 10% discount removes a quarter of the profit; on a 20% margin it removes half.
- Which margin should I quote to an investor?
- Say which one you mean. Gross, operating and net margins can differ by tens of points on the same business, and an unlabelled figure is not comparable to anything.
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