Profit margin is profit divided by revenue. That denominator is the whole point: it tells you how much of every pound of sales you keep, which makes businesses of wildly different sizes directly comparable. Gross margin uses only the direct cost of what you sold; net margin subtracts operating costs too.
The distinction between margin and markup matters here as well, in reverse. Margin divides profit by revenue, markup divides the same profit by cost. A 40% margin corresponds to a 66.7% markup, and any business that sets prices at a 40% markup while budgeting on a 40% margin will be short by roughly a quarter of the profit it expected.
On the defaults, revenue of $180,000 with $108,000 of direct costs gives a gross profit of $72,000 and a gross margin of 40.0%. After $42,000 of operating expenses the net profit is $30,000, a net margin of 16.7%. The gross margin corresponds to a markup on cost of 66.7%.
The formula
revenue- Total sales
cost of goods- Direct cost of what was sold
operating costs- Rent, wages, marketing and other overheads
margin- Profit as a percentage of revenue
How to use this calculator
- Enter total revenue for the period.
- Enter the direct cost of the goods or services sold.
- Enter operating expenses to get the net margin as well.
- The gauge shows gross margin; net margin and the markup equivalent appear below.
Worked examples
$180,000 of revenue
Gross profit is $180,000 − $108,000 = $72,000, which over $180,000 of revenue is a 40.0% gross margin. Taking off $42,000 of operating costs leaves $30,000, or 16.7%. Every pound of sales delivers 16.7p of net profit.
Margin against markup on the same figures
The same $72,000 of gross profit is 40.0% of revenue but 66.7% of the $108,000 cost. Pricing at a 40% markup instead would have produced revenue of $151,200 — $28,800 less.
How to read your score
Frequently asked questions
What is a good profit margin?
It varies so much by industry that cross-sector comparison is meaningless. Grocery retail runs on low single-digit net margins, software often exceeds 20%, and professional services sit somewhere between. Compare against your own history and your direct competitors.
What is the difference between gross and net margin?
Gross margin subtracts only the direct cost of what you sold. Net margin subtracts everything else too — rent, salaries, marketing, interest and tax. A healthy gross margin with a negative net margin means the overheads, not the pricing, are the problem.
How do I convert margin to markup?
Markup = margin ÷ (1 − margin). A 40% margin needs a 66.7% markup. This trips up more pricing decisions than any other piece of business arithmetic.
Should discounts be modelled as a margin cut?
Yes, and the effect is severe. On a 40% margin, a 10% discount removes a quarter of your profit, which means you need roughly a third more volume just to stand still.
Is contribution margin the same thing?
No. Contribution margin subtracts only variable costs, leaving what is available to cover fixed costs. It is the right measure for break-even analysis, while gross margin is the right one for pricing.
Margin reference
| Margin | Equivalent markup | Cost per $100 of sales | Profit per $100 |
|---|---|---|---|
| 5% | 5.3% | $95.00 | $5.00 |
| 10% | 11.1% | $90.00 | $10.00 |
| 20% | 25.0% | $80.00 | $20.00 |
| 30% | 42.9% | $70.00 | $30.00 |
| 40% | 66.7% | $60.00 | $40.00 |
| 50% | 100.0% | $50.00 | $50.00 |
| 60% | 150.0% | $40.00 | $60.00 |
| 75% | 300.0% | $25.00 | $75.00 |
Margin and markup describe the same profit; only the denominator changes.