How to calculate profit margin
- Enter the Cost: what you pay to make or buy one item.
- Enter the Selling price you charge for it.
- Read the profit per sale, the margin as a share of the price and the markup as a share of the cost.
Margin and markup side by side
Margin can never reach 100%, because the profit can’t be bigger than the price. Markup has no upper limit. That’s why the two numbers drift further apart as profit grows:
| Margin | Markup | Cost on a 100 price |
|---|---|---|
| 20% | 25% | 80 |
| 25% | 33.33% | 75 |
| 40% | 66.67% | 60 |
| 50% | 100% | 50 |
| 60% | 150% | 40 |
Mixing them up is a common pricing mistake. If you aim for a 40% margin but add 40% to the cost, you end up with a 28.57% margin.
Which costs to include
The margin here is gross margin: price minus the direct cost of the item. Use what one unit really costs you, including materials, the price you paid a supplier and delivery to you. Running costs such as rent, wages, software and advertising aren’t in gross margin. Take those off the total profit to get your net margin, which is always lower.
If you sell through a marketplace or take card payments, the fees come out of every sale. Add them to the cost here to see the margin you actually keep. And if your prices include VAT or sales tax, use the price without tax, because that part of the money isn’t yours.