Profit Margin Calculator

What Is Profit Margin?

Profit margin is the percentage of revenue that remains as profit after subtracting the cost of goods sold (COGS). It measures how efficiently a business converts revenue into profit — and it's one of the first metrics any investor, lender, or financial analyst will look at when evaluating a business.

There are several types of profit margin. This calculator focuses on gross profit margin — the margin after subtracting direct production costs (COGS) but before deducting overhead, operating expenses, taxes, and interest. Gross margin tells you how profitable your core product or service is before the business's fixed costs are factored in.

A business with a high gross margin has more room to cover overhead and still generate net profit. A business with a thin gross margin needs very high volume or very low overhead to survive. Understanding your gross margin is the starting point for understanding your entire cost structure.

How It Works

Enter two values:

• Cost of Goods Sold (COGS): The direct cost to produce or acquire one unit. This includes raw materials, direct labour, packaging, and any other costs that vary directly with production. Do not include rent, salaries of non-production staff, or other overhead — those are operating expenses, not COGS.
• Revenue (Selling Price): The price you charge the customer for one unit. This is the gross selling price before any discounts or returns.

The calculator subtracts COGS from revenue to find gross profit, then divides gross profit by revenue to give you the profit margin percentage. Results update instantly as you type.

Formula

Example Calculation

When to Use This Calculator

• When setting or reviewing your prices — calculate the margin at your current price to see if it's sustainable, then model what happens if you raise or lower the price
• When your costs change — if a supplier raises their prices, recalculate your margin to see the impact and decide whether to absorb the cost or raise your price
• When comparing products in your range — calculate the margin on each product to identify which are most profitable and which may be underpriced
• When preparing financial reports or investor materials — gross margin is a standard metric that investors and lenders will expect to see
• When evaluating a new product idea — before launching, calculate the expected margin to ensure the product is worth making at the price the market will bear

Common Mistakes

• Confusing margin with markup. Margin is profit as a percentage of revenue. Markup is profit as a percentage of cost. A 50% markup gives you a 33.3% margin — not 50%. If you're targeting a specific margin, use the formula: Price = Cost ÷ (1 − Target Margin %). See the Profit Margin vs. Markup guide for a full explanation.
• Including overhead in COGS. COGS should only include direct costs — materials, direct labour, and direct production costs. Rent, salaries of non-production staff, and marketing are operating expenses, not COGS. Including them in COGS will understate your gross margin.
• Using revenue before discounts. If you regularly offer discounts, use the actual net revenue received (after discounts) rather than the list price. Otherwise your margin will look better than it really is.
• Treating gross margin as net profit. Gross margin is profit before overhead. Your net profit margin — what you actually take home — will be lower once rent, salaries, marketing, and other operating expenses are deducted. Use gross margin as a starting point, not the final answer.
• Not tracking margin over time. A single margin calculation is a snapshot. Track it monthly to spot trends — a declining margin is an early warning sign of rising costs or pricing pressure.

How to Interpret Your Result

What counts as a "good" profit margin varies significantly by industry. Here are general benchmarks for gross margin:

• Grocery and food retail: 20–35% gross margin (high volume, thin margins)
• General retail: 40–60% gross margin
• Manufacturing: 25–50% gross margin
• Software (SaaS): 65–85% gross margin (low marginal cost per customer)
• Professional services: 50–80% gross margin
• Restaurants: 60–70% gross margin on food (but high overhead means net margins are typically 3–9%)

Always benchmark against your own industry. A 30% gross margin might be excellent in grocery retail but dangerously thin for a software business. The key question is: after covering overhead, is there enough gross profit left to generate a meaningful net profit?

Frequently Asked Questions

What is the difference between gross profit margin and net profit margin?

Gross profit margin is calculated after subtracting only the direct cost of goods sold (COGS). Net profit margin is calculated after subtracting all expenses — COGS, operating expenses (rent, salaries, utilities, marketing), interest, and taxes. Gross margin tells you how profitable your product is. Net margin tells you how profitable your entire business is. This calculator computes gross margin.

What is a good profit margin?

It depends entirely on your industry. For gross margin, software businesses often achieve 70–80%, while grocery retailers may operate at 20–30%. As a general rule of thumb for net profit margin: below 5% is low, 10% is average, and 20%+ is strong. But always benchmark against your specific industry rather than general averages. A 10% net margin in a high-volume, low-overhead business can be very healthy.

What is the difference between profit margin and markup?

Margin is profit expressed as a percentage of the selling price. Markup is profit expressed as a percentage of the cost. They use different bases, so they produce different percentages for the same transaction. A product that costs $60 and sells for $100 has a 40% margin but a 66.7% markup. Confusing the two is one of the most common pricing mistakes. Read the full explanation in our Profit Margin vs. Markup guide.

How do I calculate the selling price needed to achieve a target margin?

Use this formula: Price = Cost ÷ (1 − Target Margin %). For example, if your cost is $50 and you want a 40% margin: Price = $50 ÷ (1 − 0.40) = $50 ÷ 0.60 = $83.33. This is the formula used by the Pricing Calculator, which also factors in overhead.

Should I include my own salary in the cost figure?

For gross margin purposes, only include your salary if you are directly involved in production (e.g., you are the craftsperson making the product). If your salary is a fixed overhead cost regardless of production volume, it belongs in operating expenses, not COGS. For a complete picture of profitability that includes your salary as an overhead, use the Pricing Calculator.

Why is my margin lower than I expected?

Common reasons include: forgetting to include all direct costs in COGS (e.g., packaging, shipping, payment processing fees), using list price instead of actual net revenue received, or confusing markup with margin. Double-check that your COGS figure includes every cost that varies directly with each unit sold, and that your revenue figure reflects what you actually receive after any discounts or fees.

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Related Guides

• Profit Margin vs. Markup: What's the Difference?
• 5 Common Pricing Mistakes Small Businesses Make