The number that decides your price
You sell a product for $1,000 and it costs you $600 to make. You kept $400, but is that good? Profit margin answers by expressing that $400 as a percentage of the selling price, which lets you compare a $1,000 product with a $10 product on equal footing. It is the single most quoted profitability number in small business.
The formula
Formula: profit margin = (revenue - cost) / revenue x 100
Subtract cost from revenue to get profit, divide by revenue, multiply by 100. The denominator is revenue, the selling price, which is what distinguishes margin from markup.
How to use this calculator
- Enter the revenue, the selling price per unit or total.
- Enter the total cost for the same unit or period.
- Read the margin percentage and the profit in dollars.
Worked example
You sell handmade furniture for $1,000 per piece and each piece costs $600 in materials and labor. Step 1: profit = 1000 - 600 = $400. Step 2: divide by revenue, 400 / 1000 = 0.4. Step 3: multiply by 100, giving a 40 percent margin. Note the related trap: markup on the same numbers is 400 / 600 = 66.7 percent, a much bigger number describing the same $400. For the broader money picture, the credit card payoff calculator and the credit card interest calculator track financing costs, and the car lease calculator breaks down another common business expense.
Where margin guides decisions
Retailers set target margins by category and drop products that cannot hold them. Service businesses watch margin per project to spot clients that end up costing more than they pay. Investors compare margins across competitors to find the operator with the real pricing power.
Margins also differ by level: gross margin subtracts only direct costs, operating margin subtracts overhead too, and net margin subtracts everything including taxes and interest. This calculator works at whichever level you feed it, so label your result honestly, since a 40 percent gross margin and a 40 percent net margin describe very different businesses.
Common mistakes
- Confusing margin with markup. A 50 percent markup is only a 33.3 percent margin. Quote the wrong one and you misprice by a wide gap.
- Using the wrong denominator. Dividing profit by cost gives markup, not margin; be sure which number the other party expects.
- Leaving costs out. Shipping, fees, and returns are costs too. A margin computed on materials alone is a fantasy.
Limitation
This is an estimate for planning, not financial advice. Margin says nothing about cash timing, volume, or fixed costs: a 40 percent margin on ten sales a month may still lose to a 10 percent margin on ten thousand.