Profit margin calculator

How do you calculate profit margin?

Subtract cost from price, then divide by price. In the example, $100 − $60 is $40 of profit, and $40 ÷ $100 is 40%.

In a spreadsheet with cost in A2 and price in B2, margin is =(B2-A2)/B2 and markup is =(B2-A2)/A2. Format both cells as percentages. The calculator above also runs the other way: enter a price and a margin, for example, and it finds the most you can pay for the item. Any two of cost, price, profit, margin, and markup will do, as long as one of them is a dollar amount. Margin and markup alone tell you a ratio but not a price, since a 40% margin fits a $1 item and a $1,000 item equally well.

Markup vs. margin: why they are never the same number

Both use the same $40 of profit but divide it by different amounts, so markup is always the larger number when you make a profit. This is where people lose money. Say you want a 50% margin on the $60 item and you add 50% to cost. You'd charge $90, which is only a 33.33% margin. The right price is $120, so you'd give up $30 on every sale without noticing.

A 100% markup sounds huge, but it's a 50% margin. Margin can't reach 100% unless the item costs nothing, while markup has no upper limit. That's why the two numbers drift apart as prices rise.

What price do you need for a target margin?

Divide your cost by one minus the margin you want. A $60 cost and a 50% margin gives $60 ÷ 0.50, or $120.

Fees change the math because they come out of the whole price. On a $100 sale, a 15% marketplace or payment fee takes $15 and cuts your margin from 40% to 25%. To keep 50% after that fee, the price has to be $60 ÷ (1 − 0.50 − 0.15), or $171.43. The 15% here is an example, so use your provider's real rate in the advanced options.

Gross, operating, and net profit margin with an example

These three margins stop at different lines of your income statement. For a business with $500,000 of revenue, the example below ends at a 45% gross margin, a 15% operating margin, and a 10.6% net margin.

• Gross margin shows whether your product or service makes money before overhead. A weak one usually points to pricing or direct costs.
• Operating margin adds overhead such as rent, marketing, and office staff. It shows how the business itself runs.
• Net margin includes interest and taxes. It's what you actually keep, though financing choices can move it. Two businesses with the same operating margin can have very different net margins if one carries more debt.

Sales tax you collect and send to the state isn't income, the IRS says, so leave it out of revenue and out of your price here. Small price moves matter a lot at this level. A 1% price rise with the same units adds $5,000 before tax to this business's $53,000 of net profit.

What a discount really costs your margin

More than most sellers guess, because the whole discount comes out of your profit. At a 40% margin, a 10% discount removes a quarter of your profit per sale, so you need 33.3% more units to come out even.

At a discount equal to your margin, you earn nothing per sale, and no volume makes up for that. This table assumes a discount doesn't change your cost. Our discount calculator works out the sale price itself.

When a good margin still hides a problem

Margin on one item says nothing about whether the business makes money. It ignores overhead until you add it, and a healthy margin on too few sales still leaves a loss. Use the break-even calculator to see how many sales you need. Also check what counts as cost: shipping, spoilage, returns, and your own labor are easy to leave out, and each one makes a margin look better than it is.

Cost of goods sold has specific rules on a tax return, especially if you carry inventory. IRS Publication 334 explains how to figure it. An accountant or a Small Business Development Center can help you set up your numbers.

Common questions

Sources

1. Publication 334, Tax Guide for Small Business · Internal Revenue Service
2. Small Business Development Centers · U.S. Small Business Administration