The profit margin formula
Profit margin tells you how much of each sale you keep after paying for the item itself. It is a share of the selling price.
Margin % = Profit ÷ Selling price × 100
“Cost” here means everything it takes to get one item into the customer’s hands: the product, packaging, inbound shipping and, if you want a truer number, payment and marketplace fees. Leave out sales tax or VAT you collect for the government. It is not your revenue.
Worked example 1: margin from cost and price
You buy phone cases for $6 and sell them for $15.
- Profit: $15 − $6 = $9
- Margin: $9 ÷ $15 × 100 = 60%
- Markup: $9 ÷ $6 × 100 = 150%
The same $9 profit is a 60% margin but a 150% markup. That is why the two numbers should never be mixed up.
Worked example 2: price for a target margin
Your candles cost £8 each to make, and you want a 45% margin. Work backwards from the margin:
£8 ÷ (1 − 0.45) = £8 ÷ 0.55 = £14.55. Check: profit is £6.55, and £6.55 ÷ £14.55 = 45%.
A common mistake is to add 45% to the cost: £8 × 1.45 = £11.60. That is a 45% markup, and the margin is only 31%.
Worked example 3: the most you can pay
A shop wants to sell a jacket at €80 and keep a 25% margin. The most it can pay the supplier is:
€80 × 0.75 = €60. Any supplier price above €60 eats into the 25% target.
Margin and markup side by side
| Markup on cost | Margin on price |
|---|---|
| 25% | 20% |
| 50% | 33.3% |
| 100% | 50% |
| 150% | 60% |
| 200% | 66.7% |
| 300% | 75% |
To convert yourself, use margin = markup ÷ (1 + markup) and markup = margin ÷ (1 − margin). The markup calculator does this both ways.
Gross margin vs net margin
The calculator above gives your gross margin per item. Your net margin also takes off running costs that do not belong to a single sale:
Say a small online shop sells $200,000 in a year. Its goods cost $120,000 and rent, software, wages and ads cost $50,000. Net margin is ($200,000 − $120,000 − $50,000) ÷ $200,000 = 15%, even though gross margin is 40%.
Tips for using margin well
- Include fees in cost. Marketplace and payment fees often take 5–15% of the price. Find yours with the Etsy fee calculator or PayPal fee calculator, then add them to cost per item.
- Discounts hit margin hard. A 20% discount on an item with a 40% margin cuts your profit in half. On a $100 item that cost $60, the $40 profit drops to $20.
- Margin can be negative. If the cost is above the price, you are selling at a loss. The calculator shows this as a negative margin.
- Margin cannot reach 100%. That would need a cost of zero. Markup has no ceiling.
- Know your break-even. Margin per item is only half the story. The break-even calculator shows how many sales cover your fixed costs.