How to Calculate Profit Margin (and Why It Isn't Markup)
Understand profit, profit margin and markup with simple formulas and worked examples, learn how to set a price for a target margin and avoid common pricing mistakes.
By FreeToolsHub Editorial TeamPublished3 min read
Knowing your profit margin tells you how much of every sale you actually keep. It is also the number most often confused with markup, which leads to prices that earn less than the owner expected. This guide explains both, with formulas and examples you can reuse.
Three related numbers
- Profit is selling price minus cost price.
- Profit margin is profit as a percentage of the selling price.
- Markup is profit as a percentage of the cost price.
Example: You buy an item for ₹80 and sell it for ₹100.
- Profit = 100 − 80 = ₹20
- Margin = 20 ÷ 100 × 100 = 20%
- Markup = 20 ÷ 80 × 100 = 25%
Same profit, two different percentages, because they are measured against different bases. You can check any pair of numbers instantly with the Profit Margin Calculator.
Margin versus markup
Whenever you make a profit, markup is a bigger number than margin. They are linked by simple formulas:
- Margin = markup ÷ (1 + markup)
- Markup = margin ÷ (1 − margin)
| Markup on cost | Margin on price |
|---|---|
| 20% | 16.7% |
| 25% | 20% |
| 50% | 33.3% |
| 100% | 50% |
The classic mistake is adding a 20 percent markup and believing you earn a 20 percent margin. You actually earn 16.7 percent. If you have promised yourself a specific margin, price from the margin, not from a markup.
Setting a price for a target margin
If you know your cost and the margin you want, use:
Selling price = cost ÷ (1 − target margin)
Example: Cost ₹80 and a target margin of 20 percent. Price = 80 ÷ (1 − 0.20) = 80 ÷ 0.8 = ₹100. Using a 20 percent markup instead would give ₹96, which is only a 16.7 percent margin.
Gross margin and net margin
When people talk about a business, margin can mean different things:
- Gross margin counts only the direct cost of the goods sold: (revenue − cost of goods sold) ÷ revenue.
- Net margin subtracts all costs, including rent, wages, marketing, fees and taxes, from revenue.
The calculator on this site works on the two prices you enter, so it gives you a margin at whatever level of cost you include. For a realistic picture, include everything that belongs to one unit: packaging, shipping, payment fees and platform commission.
Don't forget tax and discounts
If you quote prices that include GST, the tax is collected on behalf of the government and is not your revenue. Remove it before you work out margin; our guide to calculating GST in India shows how. Discounts reduce your selling price and therefore your margin, so check them with the Discount Calculator: a 10 percent discount on an item with a 20 percent margin does not leave you with 10 percent. It leaves you with a margin of about 11 percent.
What is a good margin?
There is no universal answer. Margins differ greatly between industries, business models and sizes, and a low margin can be fine with high volume while a high margin may not cover costs at low volume. Compare against similar businesses and, above all, against your own full costs and goals.
Common mistakes
- Mixing up margin and markup.
- Leaving out costs such as delivery, returns and fees.
- Forgetting that discounts cut margin faster than they seem to.
- Calculating margin on a GST-inclusive price.
- Rounding too early and carrying small errors through many calculations.
Quick recap
Profit = price − cost. Margin = profit ÷ price. Markup = profit ÷ cost. When in doubt, enter your numbers in the Profit Margin Calculator and see all three at once. For other percentage questions, the Percentage Calculator covers increases, decreases and differences.
