How to Calculate Profit Margin (and Why It Isn't Markup)

Start with the profit

Profit = selling price − cost. If you buy something for 60 and sell it for 100, your profit is 40. Everything below is just that number divided by something else.

Margin divides by the price, markup divides by the cost

Profit margin = profit ÷ selling price × 100. On the example: 40 ÷ 100 = 40%.

Markup = profit ÷ cost × 100. Same example: 40 ÷ 60 = 66.7%.

Both describe the same 40 of profit, so neither is wrong — but they are not interchangeable. Saying "we run at 66%" when you mean markup tells a supplier or a lender you're far more profitable than you are, because margin can never exceed 100% while markup can.

Setting a price for a target margin

This is where the difference bites. To earn a 40% margin on an item costing 60, you do not add 40% — 60 × 1.40 = 84 gives you a margin of only 24 ÷ 84 = 28.6%.

The correct formula is price = cost ÷ (1 − target margin). For 40%: 60 ÷ 0.60 = 100. Check it: (100 − 60) ÷ 100 = 40%. The divide-by-less-than-one is what pushes the price higher than the naive mark-up, and it's why low-margin businesses can't price by adding a round number.

What counts as a good margin

Margins are set by the industry, not by ambition. Groceries and fuel retail commonly run 1–3%; clothing retail 40–60%; software and services 70–90%; a café's gross margin on food is often 60–70% before rent and wages.

Gross margin (price minus the cost of the item) is not net profit. Everything the margin has to pay for — rent, staff, marketing, the owner's time — comes out of it, which is why a 30% margin can still be a losing business at low volume.

Check your own numbers

Enter your cost and selling price in the Profit Margin Calculator and it returns the profit, the margin and the markup side by side, so you can see which one you've been quoting.

Useful habit: run the calculation on your three best-selling items and your three worst. The margin, not the sales count, is usually what's deciding whether the month was good.