How to calculate profit margin

First find the profit: revenue minus cost. Second divide the profit by revenue. Third multiply by 100 to get a percentage.

A product sold for 50 that costs 30 to make earns a profit of 20. The margin is 20 ÷ 50 × 100 = 40%.

Gross margin subtracts only the direct cost of the goods sold. Operating margin also subtracts running costs such as rent and salaries. Net margin subtracts everything, including interest and tax.

Each margin answers a different question: is the product priced well, is the business run efficiently, and how much is finally kept?

Margin is measured against the selling price and markup against the cost. The 50 product with a 30 cost has a 40% margin but a 66.7% markup.

If you want to hit a target margin, divide the cost by 1 minus the margin. For a 40% margin on a cost of 30, the price is 30 ÷ 0.6 = 50.

You can raise prices, lower the cost of goods, cut overheads or shift sales to higher-margin items. Even a small price rise can have a large effect on profit.

Compare your margin with others in your industry. Software and services often run well above retail and food, so a good margin depends on the sector.