How to calculate profit margin (and markup) with examples

Margin vs markup: the definitions

AccountingTools puts it simply: margin is profit as a percentage of the selling price, while markup is profit as a percentage of the product’s cost. Both start from the same figure, gross profit.

Cost of goods sold is what the goods you actually sold cost you, including shipping in and import duties. It isn’t the same as what you bought this month. For a period, COGS = opening inventory + purchases − closing inventory, the same structure as Part III of the IRS Schedule C.

Worked example: one product

Lena runs a small homeware shop in Manchester. She buys a ceramic vase for £12 (excluding VAT) and sells it for £24 including 20% VAT.

1. Price excluding VAT = £24 ÷ 1.20 = £20. Divide by 1.20; don’t take 20% off (£24 − 20% = £19.20, which is wrong).
2. Gross profit = £20 − £12 = £8 per vase.
3. Gross margin = £8 ÷ £20 = 40%.
4. Markup = £8 ÷ £12 = 66.7%.

If she wrongly used the VAT-inclusive price, she’d get (£24 − £12) ÷ £24 = 50%, overstating her margin by 10 points. The £4 of VAT goes to HMRC.

In the US, sales tax works the same way for this purpose: it’s added at the till, collected for the state and passed on, so it isn’t revenue. A $20 item in a city with 8% sales tax is still $20 of revenue.

PROFIT MARGIN WORKSHEET
Product: [Ceramic vase]              SKU: [CV-01]
Tax rate: [20% VAT / 0% / local sales tax]

Purchase cost (ex tax)                   [12.00]
+ Freight in, duties, packaging          [0.00]
= Landed cost                            [12.00]

Selling price (incl. tax)                [24.00]
Selling price ex tax = incl. ÷ (1+rate)  [20.00]

Gross profit = price ex tax − cost       [8.00]
Gross margin = profit ÷ price ex tax     [40.0%]
Markup = profit ÷ cost                   [66.7%]

Selling fees per unit (card, platform)   [0.00]
Profit after selling fees                [8.00]
Margin after selling fees                [40.0%]

In a spreadsheet, with cost in B2, the tax-inclusive price in B3 and the tax rate in B4: price ex tax =B3/(1+B4), gross profit =B3/(1+B4)-B2, margin =(B3/(1+B4)-B2)/(B3/(1+B4)), markup =(B3/(1+B4)-B2)/B2. Format the rates as percentages.

Converting markup to margin (and back)

Two formulas do all the work:

• Margin = markup ÷ (1 + markup)
• Markup = margin ÷ (1 − margin)

A 100% markup, doubling the cost, is often called keystone pricing in retail. It gives a 50% margin, not 100%. And no markup, however large, can give a 100% margin: that would mean the product cost nothing.

Pricing from a target margin

If you know the margin you want to keep:

Price = cost ÷ (1 − target margin)

Marcus sells candles from a small shop in Austin, Texas. He wants a 45% margin on a new candle that costs him $12: $12 ÷ 0.55 = $21.82. He rounds to $21.99, which gives $9.99 of gross profit and a 45.4% margin.

The common mistake is to add 45% to the cost: $12 × 1.45 = $17.40. That leaves $5.40 of profit, a 31% margin. He’d lose $4.42 on every candle compared with what he thought he was earning.

The formula gives you a floor, not the final price. Check it against competitors and what your customers will pay. If the market price is below your floor, you need a cheaper supplier, a different product, or a reason for customers to pay more.

Selling fees: the margin you don’t see

Card and platform fees come out of your margin, not the customer’s pocket. Stripe’s standard US rate for domestic online card payments is 2.9% + 30¢ per successful charge. Take a $20 candle that cost Marcus $12: on the $20 sale, the fee is $0.58 + $0.30 = $0.88. His $8 of gross profit becomes $7.12, and his margin drops from 40% to 35.6%. On low-priced items the fixed 30¢ hurts most: on a $5 sale it alone takes 6% of the price.

Add every per-sale cost the same way: marketplace commission, packaging, free shipping, returns. Then look at your margin after fees, not before.

From gross margin to net margin

A healthy gross margin doesn’t mean the business makes money. Here’s a typical month for Marcus’s shop:

Two useful numbers come out of this:

• Break-even revenue = fixed costs ÷ contribution margin = $3,300 ÷ 0.375 = $8,800 a month. Below that, the shop loses money.
• Net margin subtracts interest and income tax too. If, say, $240 went on tax, net profit would be $960, a net margin of 8%.

For a sole trader, that profit is also your pay. Anything you take from stock for yourself is a withdrawal, not a sale; our guide to separating personal and business records explains why that matters.

What’s a good profit margin?

There’s no universal “good” margin; it depends on the industry and your model. One free, regularly updated benchmark is Aswath Damodaran’s dataset at NYU Stern, updated in January 2026 and covering 5,994 US-listed companies.

These are large public companies, not small shops, so use them as context, not targets. The lesson that carries over is the gap between the two columns: a clothing business can keep more than half of each sale at the gross level and still end up with a thin net margin once stores, staff and marketing are paid.

Mistakes that wreck the calculation

Discounts also hit margin harder than they look. On the $20 candle with $8 of gross profit, a 20% discount ($4) halves the profit: you’d need to sell twice as many to earn the same.

Track your margins without a spreadsheet

The maths only works if your costs are up to date. In Binome360, each product in your “Shop” assistant has a cost and a selling price, and stock movements are logged in one sentence. Your assistant prepares the entry; you confirm.

For the stock side, see our guide to inventory management for a small business.

Frequently asked questions

What’s the formula for profit margin?

Profit margin = profit ÷ revenue × 100. Use gross profit (revenue − cost of goods sold) for gross margin, operating profit for operating margin, and net profit after all expenses, interest and tax for net margin. Always use revenue excluding sales tax or VAT.

Is a 50% markup a 50% margin?

No. A 50% markup gives a 33.3% margin. An item that costs $10 with a 50% markup sells for $15: $5 of profit is 50% of the cost but only 33.3% of the price.

How do I calculate a selling price from a margin?

Divide the cost by (1 − the margin as a decimal). For a 40% margin on a $30 cost: $30 ÷ 0.60 = $50. Check: $20 of profit ÷ $50 = 40%.

Should I use margin or markup?

Use whichever you like to set prices, but label it. Margin is better for comparing products and reading your accounts, because it’s a share of revenue. Markup is handy at the stockroom shelf, because you apply it to the cost you see on the supplier invoice.

What is a good net profit margin for a small business?

There’s no single answer. It varies widely by industry, and public benchmarks such as Damodaran’s describe large listed companies. Compare yourself with your own past months and with trade association data for your sector, and make sure your net margin pays you a fair wage on top.

In short

Work ex tax, say clearly whether you mean margin (a share of the price) or markup (a share of the cost), and set prices with cost ÷ (1 − target margin). Then subtract selling fees and fixed costs to see what the business really earns. Your first step: fill in the worksheet above for your five best-selling products this week.

Sources

• AccountingTools (Steven Bragg), “The difference between margin and markup”: accountingtools.com.
• Aswath Damodaran, “Operating and Net Margins by Industry Sector”, NYU Stern, data as of January 2026 (5,994 US companies): pages.stern.nyu.edu/~adamodar.
• IRS, Schedule C (Form 1040), Part III “Cost of Goods Sold”: irs.gov/forms-pubs/about-schedule-c-form-1040.
• GOV.UK, “VAT rates on different goods and services”, updated 10 July 2026: gov.uk/guidance/rates-of-vat-on-different-goods-and-services.
• Stripe, “Pricing” (US standard online card rate, 2.9% + 30¢), consulted September 2026: stripe.com/pricing.

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