How the profit margin is calculated
Profit margin (gross margin) tells you how much of each sale you keep after paying for the product itself:
- Profit = selling price − cost
- Margin % = profit ÷ selling price × 100
- Price for a target margin = cost ÷ (1 − margin)
- Maximum cost for a price and margin = price × (1 − margin)
Example: a candle costs you $12 to make and sells for $30. Profit is $18, the margin is 18 ÷ 30 = 60%, and the markup is 18 ÷ 12 = 150%.
Margin vs markup
The two numbers describe the same profit from different sides, and mixing them up is one of the most common pricing mistakes. If you add a “50% markup” when you meant a 50% margin, you end up with a 33% margin.
| Markup | Equals margin |
|---|---|
| 25% | 20% |
| 50% | 33.3% |
| 100% (double the cost) | 50% |
| 150% | 60% |
| 200% (triple the cost) | 66.7% |
Switch the calculator to Markup to work the other way, or use the dedicated markup calculator.
What to put in “cost”
For a quick product margin, use the purchase or manufacturing cost per unit. For the margin you actually earn per order, also add:
- payment processing fees (roughly 3% + a fixed fee per order — see the fee calculator),
- packaging and pick-and-pack costs,
- shipping you pay for but don’t charge,
- an allowance for returns and damaged goods.
Advertising and fixed overheads are usually left out of gross margin and handled in a break-even calculation instead.
Using the target-margin table
The table under the calculator lists the price you need at common margins and markups for the cost you entered. It’s a quick way to set list prices, check whether a supplier’s recommended retail price leaves you enough room, or decide how deep a sale can go before it stops paying.
Margins and volume discounts
Quantity discounts eat into margin quickly: 15% off a product with a 40% margin cuts the margin to about 29%. Before you publish price breaks, run the numbers in the tiered pricing calculator, which flags any tier that falls below the lowest margin you accept.