What Is Profit Margin and How Do You Calculate It?

What does profit margin mean?

Profit margin shows what percentage of revenue remains as profit after the relevant costs are deducted. It helps put profit into context: £20 profit on a £100 sale is very different from £20 profit on a £30 sale.

There are several types of margin in business accounts. For a simple product calculation, people often compare selling price with the direct cost of the item.

Want to try the idea yourself? Use the Profit Margin Calculator.

How to calculate profit margin

First calculate profit: selling price minus cost. Then divide the profit by the selling price and multiply by 100.

If an item costs £60 and sells for £100, the profit is £40. £40 divided by £100 is 0.40, so the profit margin is 40%.

If you want to explore this topic further, see What Is the Break-Even Point? A Simple Guide.

Margin is not the same as markup

Margin compares profit with the selling price. Markup compares profit with the cost. Because they use different starting figures, the percentages are not normally the same.

Using the same example, £40 profit on a £60 cost is a 66.7% markup, but the margin on the £100 selling price is 40%. Mixing these up can lead to incorrect pricing.

What is a good profit margin?

There is no single good margin for every business. Typical margins vary greatly by industry, product type, overheads, competition and sales volume. A lower-margin product can still be worthwhile if it sells in high volume.

When assessing a business, also remember that a simple product margin may not include wages, rent, marketing, payment fees, tax and other overheads.

Check margin before setting a price

The Profit Margin Calculator is useful when you know a cost and selling price and want to see the resulting profit and percentage quickly. You can also test alternative selling prices to see how the margin changes.

For pricing decisions, make sure the cost figure you use includes the costs you genuinely need the sale to cover.