Profit margin measures how much of each sales dollar is kept as profit after covering the cost of goods sold. It's one of the most important numbers in pricing and business planning, and it's often confused with markup, which is a related but different calculation (covered in our markup calculator).
The formula
For a $100 selling price with a $60 cost: profit is $100 − $60 = $40, and margin is $40 ÷ $100 × 100 = 40%. Margin is always calculated against the selling price, not the cost.
Worked examples
| Cost | Selling price | Profit | Margin |
|---|---|---|---|
| $40 | $50 | $10 | 20% |
| $15 | $45 | $30 | 66.7% |
| $200 | $250 | $50 | 20% |
Margin vs. markup — the key difference
Margin is profit as a percentage of selling price. Markup is profit as a percentage of cost. The same $40 profit on a $60 cost is a 40% margin but a 66.7% markup — using the wrong one when setting prices is a common and costly business mistake.
Common mistakes
- Confusing margin with markup. They use different denominators and are never equal (except at 0%).
- Ignoring all costs. "Cost" should include the full landed cost of the product, not just the wholesale purchase price, if you want an accurate margin.
Tips
- Track margin trends over time, not just a single snapshot — a slowly shrinking margin is an early warning sign for a business.
- Use the markup calculator when setting a price target from cost, and this margin calculator when analyzing an existing price.
Frequently asked questions
How do I calculate profit margin?
Subtract the cost from the selling price to get profit, then divide profit by the selling price and multiply by 100.
What's the difference between margin and markup?
Margin expresses profit as a percentage of the selling price, while markup expresses profit as a percentage of the cost. They use different bases and are always different numbers for the same sale.
What's a good profit margin?
It varies significantly by industry — retail and grocery often run thin single-digit margins, while software and services can run much higher. Compare margins within your own industry rather than against a universal benchmark.
References
- Investopedia — General explainer on gross margin and profitability ratios