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How to Calculate Profit Margin (With Examples)

Use the profit margin formula correctly, avoid confusing it with markup, and test your pricing with examples.

Profit margin tells you what share of a sale remains after a chosen set of costs. The formula is (revenue − cost) ÷ revenue × 100%. Always say which costs you included: a product's gross margin is different from a business's net margin after operating expenses.

Example: a product sale

A product sells for 80 and costs 50 to buy. The gross profit is 30. Divide 30 by the 80 selling price to get a gross margin of 37.5%. If the product sells for 60 instead, profit is 10 and margin falls to about 16.67%. A price cut of 25% reduced the profit per item by two thirds.

Margin is not markup

Markup compares profit with cost; margin compares profit with selling price. In the 80-versus-50 example, markup is 30 ÷ 50 = 60%, while margin is 30 ÷ 80 = 37.5%. Using 60% as the margin would overstate the share of the sale you keep.

Which costs should you include?

For gross margin, include direct costs tied to the sale, such as the item cost and any per-item production cost. For net margin, include wider operating expenses such as rent, payroll and software, using the same period as the revenue. Payment fees, returns and shipping can also matter. Pick a consistent definition so comparisons remain useful.

How to use the number

Compare margins across products and over time, then ask why they changed. A low-margin item may still be worthwhile if it sells frequently, but it must help cover overhead. Use the profit margin calculator for a quick check. If you start from cost and want to set a selling price, check the markup calculator too.