The profit margin formula
Profit margin is profit divided by revenue, multiplied by 100. Gross margin uses revenue minus the cost of the goods sold; operating margin also subtracts running costs such as rent and wages; net margin subtracts everything, including interest and tax. Sell something for 100 that cost 60, and the gross margin is 40 divided by 100, which is 40 per cent.
The Profit Margin Calculator applies the formula and shows its working. Profit Margin Calculator
Working out a margin
- Take the selling price, or the total revenue for a period.
- Subtract the costs that belong to the margin you want: cost of goods for gross, plus running costs for operating, plus everything for net.
- Divide what is left, the profit, by the revenue.
- Multiply by 100 to express it as a percentage.
Gross, operating and net margin
Gross margin is revenue minus the cost of goods sold, divided by revenue. Cost of goods sold is what it cost to make or buy the things you sold: materials, stock, direct labour. It tells you whether the product itself is priced well.
Operating margin is operating profit divided by revenue, where operating profit also takes off the cost of running the business: rent, salaries, software, marketing. It tells you whether the business works, not just the product.
Net margin is net profit divided by revenue, after interest and tax as well. It is the figure that says how much of every sale you keep.
A worked example
A shop sells 10,000 of goods in a month. The stock it sold cost 6,000, rent and wages came to 2,500, and interest and tax to 500.
Gross margin is 10,000 minus 6,000, divided by 10,000: 40 per cent. Operating margin takes off the 2,500 as well: 15 per cent. Net margin is the 1,000 left at the end, divided by 10,000: 10 per cent.
One month produces three honest margins, so say which one you mean whenever you quote a margin.
Working backwards from a target margin
To price for a target margin, divide the cost by one minus the margin. For a 40 per cent margin on something that costs 60, that is 60 divided by 0.6, which is 100.
The common mistake is adding 40 per cent to the cost instead, which gives 84 and a margin of only 28.6 per cent. Adding a percentage to the cost is markup, not margin.
The formula in a spreadsheet
With the price in A2 and the cost in B2, gross margin is =(A2-B2)/A2, formatted as a percentage. The price for a target margin held in C2 is =B2/(1-C2).
Questions people ask next
What is the difference between margin and markup?
Margin divides profit by the selling price and markup divides it by the cost. A 50 per cent markup is a 33.3 per cent margin.
Can a profit margin be over 100 per cent?
No. Margin divides by the selling price and profit can never exceed the price, so it always stays below 100 per cent. Markup has no ceiling.
Is gross margin the same as gross profit?
No. Gross profit is an amount: revenue minus the cost of goods sold. Gross margin is that amount as a percentage of revenue.
What is a good net profit margin?
It varies widely by industry. Compare yourself with businesses doing the same work, not with a general average.