How to Calculate Profit Margin Percentage: Formulas & Examples
Every business owner needs to understand profit margins. Whether you sell physical products online, run a local retail store, or offer client services, your profit margin determines how much actual money stays in your bank account after covering expenses.
Profit margin measures the percentage of revenue that turns into net profit. If your business earns $100 in sales and incurs $70 in costs, your net profit is $30, giving you a 30 percent profit margin.
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The Profit Margin Formula
Calculating profit margin percentage requires two basic financial numbers: total sales revenue and total costs (cost of goods sold or operating expenses).
Alternatively, since profit equals revenue minus cost, the simplified formula is:
Step-by-Step Margin Calculation Example
Let us walk through a practical retail pricing scenario:
- Determine your product cost: You purchase a wholesale item for $40.
- Set your selling price: You list the item in your store for $100.
- Calculate gross profit: $100 revenue minus $40 wholesale cost equals $60 gross profit.
- Apply the margin formula: Divide $60 profit by $100 revenue ($60 / $100 = 0.60).
- Convert to percentage: Multiply 0.60 by 100 to get a 60% profit margin.
Gross Profit Margin vs Net Profit Margin
Businesses track two primary types of profit margins:
| Metric | Formula | What It Measures |
|---|---|---|
| Gross Margin | [(Revenue - COGS) / Revenue] x 100 | Efficiency of direct production or wholesale cost. |
| Net Margin | [(Revenue - Total Expenses) / Revenue] x 100 | Overall profitability after rent, marketing, taxes, and overhead. |
What Is a Good Profit Margin?
A good profit margin varies significantly by industry. According to financial benchmark data:
- Retail & Grocery: 5% to 10% net margin due to high inventory turnover.
- E-commerce & Direct-to-Consumer: 15% to 25% net margin.
- SaaS & Software: 70% to 85% gross margin, 20% to 40% net margin.
- Consulting & Professional Services: 20% to 35% net margin.
To analyze your product prices and compare markup against profit margin, try our free Margin Calculator and Percentage Calculator.
