Profit Margin Calculator

About this Profit Margin Calculator

The Profit Margin Calculator compares revenue with cost to show both the profit amount and the percentage of revenue retained as profit. It can help with quick pricing reviews, product comparisons and business planning.

Profit margin, calculated as profit divided by revenue, is one of the most widely used metrics for judging how efficiently a business converts sales into actual profit, and comparing margins across periods is often more informative than looking at raw profit dollar amounts alone.

For related tasks, try Markup Calculator, Discount Calculator or Break-Even Calculator.

How the calculation works

Profit equals revenue minus cost. Profit margin is profit ÷ revenue × 100. This is a simple gross calculation and does not automatically include taxes, overhead or other expenses unless you include them in cost.

How to use it

1. Enter total revenue or selling price.
2. Enter the associated total cost.
3. Calculate to see profit and profit margin.

Practical example

Revenue of 1,000 with cost of 700 produces profit of 300 and a 30% margin.

A business with 100,000 in revenue and 65,000 in cost of goods sold has a gross profit of 35,000 and a gross profit margin of 35%, a figure that would then need to absorb operating expenses, taxes and other costs before arriving at net profit.

Things to double-check

Profit margin can refer to gross margin, operating margin or net margin, and this calculator computes a straightforward gross margin from revenue and cost, so be clear about which margin type you're comparing against industry figures.

Reading gross margin

Gross profit margin is the share of revenue left after the direct cost of what you sold. With revenue of 80,000 and cost of goods of 52,000, gross profit is 28,000 and the margin is 35 percent: for every 100 of sales you keep 35 to pay for everything else. A higher margin gives you more room to absorb rent, wages, marketing and mistakes. A low margin is not always bad, for example grocery businesses depend on volume, but it means small cost increases can wipe out profit quickly.

Gross, operating and net margin

Margins get smaller as you include more costs. If the business above pays 15,000 in operating expenses such as rent and wages, operating profit is 13,000 and the operating margin is 16.25 percent. After interest and tax, the net margin is smaller again. This calculator uses revenue and cost, so its result is a gross margin unless you enter all costs as the cost figure. When you compare your margin with a competitor's or an industry average, make sure both numbers measure the same level of profit, otherwise the comparison misleads.

How to improve a margin

There are three levers: raise the price, cut the cost or change the mix of what you sell. A product with a price of 100 and a cost of 65 has a 35 percent margin. A 5 percent price rise to 105 lifts it to about 38.1 percent, and cutting the cost by 5 to 60 lifts it to 40 percent. Test price changes carefully, because volume may fall. Look for savings by renegotiating with suppliers, reducing waste and removing products that sell slowly. Margin improvements add up quickly because they apply to every future sale.

Watch the trend, not one number

A single margin figure is a snapshot, so track it month by month. If revenue rises 10 percent while costs rise 15 percent, profit falls even though sales look strong. Compare margins by product or customer to find the ones that quietly lose money after discounts and returns. Seasonal businesses should compare the same months in different years. Keep the method consistent, including which costs you treat as direct, so changes in the number reflect real changes in the business and not changes in how you calculate it.

What a discount does to your margin

A discount cuts the margin more than the percentage suggests. If a product sells at 100 and costs 65, the margin is 35 percent. A 10 percent discount lowers the price to 90, the profit to 25 and the margin to about 27.8 percent. To earn the same total profit, you need to sell about 40 percent more units, because 35 divided by 25 is 1.4. Before you run a promotion, calculate how much extra volume it requires and whether you can realistically reach it.

Worked example: an online store

An online store has revenue of 150,000 in a year. The goods cost 90,000, which leaves a gross profit of 60,000 and a gross margin of 40 percent. Then shipping and packaging take 12,000, payment fees take 4,500, advertising takes 18,000 and software and other costs take 6,000. After these costs, the profit is 19,500, a net margin of 13 percent. Looking only at the gross margin makes the business look strong, but the net figure shows how much is left after the real costs of selling. Each cost can then be examined to see where improvement is possible.

Margins differ between industries

Typical margins vary by sector. Grocery retailers often earn net margins of only a few percent, restaurants usually earn somewhat more but face high labour and food costs, and software and online services can have gross margins of 70 percent or more. A margin that is excellent in one industry may be poor in another, so compare with businesses like yours. Within a business, margins also differ between products, customers and sales channels. Break the overall figure down to find the items that earn the most and those that drag the average down, then decide whether to raise prices, reduce costs or stop selling them.

Setting a price to reach a target margin

To reach a target margin, divide the cost by one minus the margin. If a product costs 62 and you want a 30 percent margin, the price is 62 divided by 0.70, which is 88.57. For a 45 percent margin the price is 62 divided by 0.55, which is 112.73. Notice that adding 30 percent to the cost would give only 80.60, a margin of about 23 percent. Use the formula whenever you set prices from a margin target, and include all costs that belong to the product, such as packaging, delivery and payment fees, before you divide.

Margin, cash and growth

A healthy margin does not guarantee healthy cash. A business with a good margin can still run short if customers pay slowly, stock is expensive or growth ties up money in inventory. Customer acquisition costs also change the picture: if it costs 30 in advertising to win a customer who gives a 40 profit on the first order, the net on that order is only 10. Track the margin monthly, along with cash and the cost of winning customers. Improving margin by a few points usually has a larger effect on profit than a similar rise in sales, so it is worth regular attention.

Key terms explained

Revenue is the money from sales. The cost of goods sold is the direct cost of what you sold. Gross profit is revenue minus that cost, and gross margin is gross profit divided by revenue. Operating profit subtracts running costs such as rent, wages and marketing, and net profit also subtracts interest and tax. The contribution margin is the price minus variable costs. EBITDA is earnings before interest, tax, depreciation and amortisation, a measure used to compare businesses. Each measure answers a different question, so state which one you mean.

Rules of thumb and quick checks

Margin equals profit divided by price. A one percentage point improvement on 1,000,000 of revenue is worth 10,000 of profit. If your costs rise by 10 percent and you want the same percentage margin, you need to raise prices by about 10 percent as well. Compare your margin with firms in the same industry, not with firms in others, and look at the trend over several periods. If margin falls while sales rise, find out whether discounts, returns or higher costs are the cause.

Read the full guide

Want the background, a step-by-step example and the common mistakes? Read Markup vs Margin: How to Price a Product and Protect Your Profit. Markup and margin are not the same. Learn both formulas, how to convert between them, how to price for a target margin and how discounts reduce profit.

Frequently asked questions