Profit margin calculator

The same profit, two different numbers

Buy something for 40, sell it for 50, and you have made 10. Whether that is “20% ” or “25%” depends on what you measure it against. Against the 50 you took, it is a 20% margin. Against the 40 you paid, it is a 25% markup. Both are correct and they are not interchangeable.

Margin is the figure accountants and investors use, because it answers “how much of each sale do we keep?”. Markup is the figure buyers and pricing sheets use, because it answers “what do I add to the cost?”. Trouble starts when one is written down and the other is read.

The mistake this tool exists to prevent

Told to price at a 30% margin, adding 30% to the cost gives a 23% margin instead, about a third less profit than intended. Repeated across a price list, that is the difference between a business that works and one that does not, and it is invisible until the year end.

The correct sum is to divide by 1 minus the margin, not to multiply by 1 plus it. A 30% margin on a cost of 40 needs a price of 40 / 0.7 = 57.14, not 52. Both percentages are always shown above, whichever one you enter, so the two can be compared before a price goes out.

Why margin has a ceiling and markup does not

A margin of 100% would mean every penny of the selling price is profit, which is only true if the goods cost nothing. As the target approaches 100% the price climbs away: 50% needs double the cost, 90% needs ten times it, 99% needs a hundred times. Markup has no such limit, a 900% markup is just a price ten times the cost, which is a 90% margin.

That asymmetry is why the two diverge so sharply at the top end and stay close at the bottom. At 5% they are barely distinguishable; at 50% one of them is half as much profit as the other.

This is gross margin, not profit

Everything here compares one item’s cost against its price. Rent, wages, shipping, packaging, returns, payment processing, advertising and tax all come out of what is left, and for most businesses they come to more than people expect. A 30% gross margin can easily be a loss once they are paid.

There is also no sensible universal answer to “what margin should I aim for”. Supermarkets survive on a few percent because they sell enormous volumes; specialist goods carry several times that because they do not. Compare against others selling something similar, and against what your own overheads actually require.