Key takeaways
- Margin = ((Revenue − Cost) ÷ Revenue) × 100.
- Markup divides the same profit by Cost instead of Revenue, giving a higher percentage.
- Margin is always smaller than markup for the same sale, because revenue is usually bigger than cost.
- There's no universal "good" margin — it varies a lot by industry.
In this guide
What is profit margin?
Revenue is the total money coming in from a sale. Cost is what it took to produce or acquire what you sold. Profit margin compares the profit (revenue minus cost) to the revenue itself, giving a percentage that shows how much of every dollar you keep as profit.
Why does profit margin matter?
Margin is one of the fastest ways to judge whether a sale — or an entire business — is healthy. A low margin can mean trouble even if total revenue looks impressive, because there's little room left after covering costs.
Selling a $1,000 handmade item that cost $600 to make gives a 40% profit margin, but a 66.67% markup — the exact same $400 profit, described two different ways.
The formula
| Symbol | What it means | Example |
|---|---|---|
| Revenue | Total sales amount | $1,000 |
| Cost | What it cost to produce or buy what was sold | $600 |
| Margin | Profit as a percentage of revenue | 40% |
How to calculate profit margin step by step
- 1Subtract the cost from the revenue. This gives the profit.
- 2Divide the profit by the revenue. This is the key step that makes margin different from markup.
- 3Multiply by 100. The result is the profit margin percentage.
- 4For markup instead, divide the same profit by the cost. Then multiply by 100 for the markup percentage.
Enter your own revenue and cost in the calculator below to see both margin and markup.
Try it yourself
Pre-filled with the example — change any value.
Common mistakes to avoid
- Dividing by the wrong number. Margin is always profit ÷ revenue, never profit ÷ cost.
- Forgetting to include all costs. Leaving out shipping, packaging, or overhead makes the margin look better than it really is.
- Assuming a target margin sets the price directly. To hit a target margin, the price formula is different from simply adding a markup — see the tips below.
Tips and tricks
- It varies a lot by industry — a grocery store and a software company have very different typical margins — so compare against similar businesses, not a fixed target.
- Works alongside the break-even point calculator for planning sales targets across a whole product line.
- For a single transaction rather than an ongoing margin, the profit or loss calculator measures the same profit against cost instead.
Where you'll use it in real life
- Pricing products: deciding how much to charge to hit a target profit margin.
- Comparing product lines: seeing which products are more profitable relative to their sales price.
- Business health checks: a shrinking margin over time can be an early warning sign of rising costs.
- Negotiating with suppliers: understanding how a lower cost price would improve margin.
Quick summary
Profit margin is ((Revenue − Cost) ÷ Revenue) × 100, always measured against revenue. Markup uses the same profit but divides by cost instead, giving a larger number. Use the calculator above to see both figures for your own sale.
Worked example
A small shop sells a handmade item for $1,000 in revenue, after it cost $600 to make.
- 01Margin = ((Revenue - Cost) / Revenue) × 100
- 02Profit = $1,000 - $600 = $400
- 03Margin = (400 / 1000) × 100 = 40%
- 04Markup = (400 / 600) × 100 = 66.67%
These numbers are pre-filled in the calculator above.
Frequently asked questions
What's the difference between profit margin and markup?
Profit margin divides profit by revenue (what you sold it for), while markup divides the same profit by cost (what you paid). Because revenue is usually larger than cost, margin is always a smaller percentage than markup for the same sale.
What is a good profit margin?
It varies a lot by industry — a grocery store and a software company have very different typical margins — so it's more useful to compare your margin against similar businesses than against a single fixed target.
How do I calculate the selling price for a target profit margin?
Divide the cost by (1 − target margin ÷ 100). For a $600 cost and a target 40% margin, that's 600 ÷ 0.60 = $1,000.
Can profit margin be negative?
Yes. If the cost is higher than the revenue, profit is negative, meaning the sale lost money, and the margin percentage is negative too.
