Profit Margin Calculator
Margin and markup describe the same profit and produce different percentages, because one divides by the price and the other by the cost. Confusing them is the most expensive arithmetic error in small business, and it always runs the same direction: you charge less than you meant to. This shows both, and the price a target margin actually requires.
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Formula
The error, and what it costs
Suppose an item costs $70 and you want a 40 percent margin. The instinct is to add 40 percent to the cost: $70 × 1.40 = $98. That is a 40 percent markup, and it gives a margin of 28.6 percent, not 40. To actually achieve 40 percent margin the price must be $70 ÷ 0.60 = $116.67.
The gap is $18.67 on a single item, or a fifth of the revenue. A business making this mistake across its whole catalogue is not slightly under-priced; it is losing most of its intended profit, and it will usually conclude that its costs are the problem.
Which one to use, and when
Markup is a pricing instruction: it tells you what to do to a cost to arrive at a price. Margin is a performance measure: it tells you what share of revenue you keep. Both are correct, and they answer different questions — the trouble only starts when a number quoted in one is used as if it were the other. A supplier talking about “keystone” means a 100 percent markup, which is a 50 percent margin. Retail conversation drifts between the two constantly.
Margin cannot reach 100 percent
Markup has no ceiling — a 400 percent markup is ordinary in some trades. Margin has one: it approaches 100 percent but never gets there, because profit cannot exceed the price it is a share of. If someone quotes a 150 percent margin, they mean markup. This is a quick way to catch the confusion in a conversation.
Gross margin is not profit
Everything above is gross margin: price less the direct cost of the thing sold. Rent, wages, software, insurance and your own time come out of what is left. A healthy-looking 40 percent gross margin can be a loss-making business once overheads are counted, and a 15 percent margin at high volume can be an excellent one. Gross margin tells you whether each sale is worth making; it does not tell you whether the business works.
Discounting costs more than the discount
A 10 percent discount does not cost 10 percent of profit — it costs 10 percent of the price, taken entirely from the profit. On a 40 percent margin, a 10 percent discount removes a quarter of the profit on that sale. On a 20 percent margin it removes half. Before running a sale, work out how many more units you would have to sell simply to stand still; the answer is usually larger than expected.
Frequently asked questions
What is the difference between margin and markup?
Margin divides profit by the selling price; markup divides the same profit by the cost. A 50 percent markup is a 33 percent margin.
How do I price for a 40 percent margin?
Divide the cost by 0.60. A $70 cost needs a $116.67 price. Adding 40 percent to cost gives $98, which is only a 28.6 percent margin.
Can margin be over 100 percent?
No. Profit is a share of the price, so margin approaches 100 percent without reaching it. Markup has no upper limit, so anything above 100 must be markup.
What is a good profit margin?
It depends entirely on the trade: grocery runs on a few percent at volume, software on eighty. Compare against your own sector and against your overheads, not against a general figure.
How much does a discount cost me?
The full discount comes out of profit. Ten percent off a product on a 40 percent margin removes a quarter of the profit on that sale.