PROFIT MARGIN
What profit margin means
Profit margin is the percentage of a sale left after the direct cost of that item.
FORMULA
Profit margin formula
Take the cost away from the selling price. Divide that profit by the selling price and multiply by 100.
EXAMPLE
$100 selling price, $60 cost
Profit is $40. That is a 40% margin and a 66.67% markup.
- Gross profit
- $40
- Profit margin
- 40%
- Markup
- 66.67%
MARGIN AND MARKUP
They are not the same percentage.
Margin is based on the selling price. Markup is based on cost. On a $100 sale with a $60 cost, 40% margin equals 66.67% markup.
MarginProfit ÷ selling price
MarkupProfit ÷ cost
Target priceCost ÷ (1 − target margin)
QUESTIONS
Profit margin questions
How do you calculate profit margin?
Take the cost away from the selling price. Divide the result by the selling price, then multiply by 100. For example: a $60 cost and $100 price gives you $40 profit and a 40% margin.
What is the difference between margin and markup?
Margin is based on the selling price. Markup is based on the cost. They use the same profit amount, but the percentage is different.
How do I set a price for a target margin?
Divide your cost by one minus the target margin. A $60 cost with a 40% target margin needs a $100 selling price.
Can profit margin be negative?
Yes. If the cost is higher than the selling price, you are losing money on that sale.
Which costs should I include?
Use the costs tied to that sale: materials, production, packaging, shipping, payment fees, and any other direct cost.