How to Calculate Profit Margin and Markup
If you sell products or services, you need to know your margin and your markup. They sound alike but give different numbers.
Profit, margin and markup
Profit is selling price minus cost. Profit margin is profit as a percentage of the selling price. Markup is profit as a percentage of your cost.The formulas
- Profit = selling price − cost
- Margin % = profit ÷ selling price × 100
- Markup % = profit ÷ cost × 100
- Selling price from a target margin = cost ÷ (1 − margin ÷ 100)
- Selling price from a markup = cost × (1 + markup ÷ 100)
Worked example
You buy a product for $45 and sell it for $75. Profit is $30. Margin is 30 ÷ 75 × 100 = 40%. Markup is 30 ÷ 45 × 100 = 66.67%. The same sale is a 40% margin and a 66.67% markup.
Pricing from a target margin
You want a 30% margin on an item that costs $45. Selling price = 45 ÷ (1 − 0.30) = 45 ÷ 0.70 = $64.29, which gives $19.29 of profit. A common mistake is to add 30% to the cost instead, giving $58.50 and only a 23.1% margin.
Markup does not equal margin
A 50% markup is a 33.3% margin. A 100% markup is a 50% margin. A 25% margin needs a 33.3% markup. Mixing these up is one of the most common pricing mistakes in small business.
Total profit with quantity
Multiply profit per item by the number sold. Selling 10 items that each give $15 profit makes $150. Our Profit/Loss Calculator does this and shows the percentage on cost.
What to include in cost
To understand real profit, include everything you pay to get the item to the customer:
- Purchase or production cost
- Shipping and packaging
- Payment processing and marketplace fees
- Taxes you cannot recover
- Returns and damaged goods
- Your time, if you pay yourself
Gross margin vs net margin
Gross margin only subtracts the direct cost of the goods. Net margin also subtracts overhead such as rent, advertising, software and wages. A business can have a healthy gross margin and still lose money if overhead is too high.
What is a good margin?
It depends on the industry. Some retail and online sellers aim for a gross margin of 30% to 50% or more, while grocery and some wholesale businesses work with much thinner margins. Compare yourself with similar businesses.
Quick pricing tips
- Decide your target margin first, then calculate the price
- Check competitors' prices before finalizing
- Test small price changes and see how sales respond
- Recalculate when your costs change
Use the calculator
Enter your cost and target margin in our Markup and Margin Calculator to see the selling price, profit and markup. This guide is general information and not financial advice.
Example: a service business
A freelancer charges $60 an hour and the direct cost of that hour (software, subcontracting, fees) is $40. Profit is $20 an hour. Margin is 20 ÷ 60 = 33.3% and markup is 20 ÷ 40 = 50%.
Break-even quantity
If your fixed costs for a month are $1,000 and each item gives $12.50 of profit, you need 1,000 ÷ 12.50 = 80 sales to break even. Every sale after that adds profit.
Discounts hurt margin more than you expect
An item costs $60 and sells for $100, a 40% margin. A 20% discount drops the price to $80. Profit is now $20, so the margin falls to 25%. Before running a sale, calculate the new margin and check that you will still cover your costs.
Frequently asked questions
Which is better to use, margin or markup?
Margin is easier to compare with other businesses. Markup is quick for pricing. Know which one you are using.
Can margin be above 100%?
No. Margin is based on the selling price, so it is always below 100%. Markup can exceed 100%.
Does margin include tax?
Usually no. Sales tax collected from customers is not your profit.