Profit Margin Calculator

Margin and markup are not the same number

Both describe the gap between cost and price, but they divide it by different things:

• Gross margin = (price − cost) ÷ price
• Markup = (price − cost) ÷ cost

So a 50% markup is only a 33% margin, and a 100% markup is a 50% margin. Markup is always the larger-looking number, which is exactly why it is the one people quote and the one that causes trouble. If you set prices by applying a markup but model your business on margin, every product is less profitable than the plan says.

Where margin calculations go wrong

The first trap is treating gross margin as profit. Gross margin only accounts for the direct cost of the unit — it says nothing about overheads, fulfilment, payment fees, returns or acquisition cost, all of which come out of that margin before anything reaches the bottom line. The second trap is discounting. A 20% discount does not cost you 20% of profit; on a 40% margin it removes half of it, because the discount comes entirely out of the margin rather than out of the cost. Running the discounted price back through the calculator is usually more sobering than estimating it.