Profit margin calculator

Margin and markup, precisely

Both describe the same gross profit. They differ only in what they divide it by:

• Margin = profit ÷ price. The share of each sale you keep. Can never reach 100%.
• Markup = profit ÷ cost. How much you added on top of what you paid. Can exceed 100% freely.

Buy at $40, sell at $60. Profit is $20. Margin is 20/60 = 33.3%. Markup is 20/40 = 50%. Same transaction, two very different-looking numbers, and only one of them is what your accountant means by margin.

The mistake this causes

A business wants a 30% margin and applies a 30% markup. On a $40 item that gives a $52 price — a margin of 23%, not 30%. Repeated across a catalogue, that gap is the difference between a healthy year and a bad one, and it is invisible unless someone checks the arithmetic.

Going the other way is just as common. A supplier quotes "40% markup" and a buyer budgets as though it were a 40% margin, then finds the numbers do not reconcile at the end of the quarter.

To convert: markup = margin / (1 − margin), and margin = markup / (1 + markup). A 50% margin needs a 100% markup. A 33.3% margin needs a 50% markup.

Pricing to a target margin

To hit a target margin you divide rather than multiply: price = cost / (1 − margin). For a 35% margin on a $40 item, that is 40 / 0.65 = $61.54. Multiplying by 1.35 would have given $54, a margin of only 26%.

Note what happens as the target rises. At 50% the divisor is 0.5 and the price doubles. At 90% it is 0.1 and the price is ten times cost. At 100% the divisor is zero and the price is undefined — which is the arithmetic telling you that keeping all of a sale as profit requires the goods to be free.

Gross margin is not profit

Everything here is gross margin: revenue minus the direct cost of the goods. It does not include rent, salaries, software, marketing, payment processing fees or tax. A healthy gross margin can still produce a loss once those are paid.

For anything you sell online, remember that payment processing takes roughly 1.5-3% of the full price, and returns take the whole margin plus the shipping. If you are pricing for a marketplace that charges commission, treat that commission as a cost before computing margin, or the figure will flatter you.

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