Profit margin tells you how much of every dollar in sales you keep. It's the number to watch when you set prices, compare products, or decide whether a sale is worth running.

The formula

Profit margin = (revenue − cost) ÷ revenue × 100

The key word is revenue. Margin always divides by the selling price, never by the cost. Dividing by cost gives you markup, which is a different number. (More on that in Markup vs. Profit Margin.)

Worked example

You sell handmade candles. Each one costs you $8 in wax, wick, jar, and label, and sells for $20.

Step Math Result
Profit per candle $20 − $8 $12
Profit margin $12 ÷ $20 × 100 60%

You keep 60 cents of every dollar in candle sales before covering your other business costs.

Calculate margin for your own product.

Open the Profit Margin Calculator

Three kinds of margin

The word "margin" is used three ways. They answer different questions.

Margin What you subtract from revenue What it tells you
Gross margin Cost of goods sold: materials, wholesale cost, direct labor How profitable the product itself is
Operating margin Cost of goods sold and operating expenses: rent, software, marketing, salaries How profitable the business is from its main activity
Net margin Everything, including interest and taxes What's left at the very end

Example for a month:

Line Amount
Revenue $10,000
Cost of goods sold −$4,000
Gross profit $6,000 (60% gross margin)
Operating expenses −$3,500
Operating profit $2,500 (25% operating margin)
Interest and taxes −$700
Net profit $1,800 (18% net margin)

A high gross margin doesn't guarantee a profitable business. If overhead eats it, the net margin can still be thin or negative.

Finding the price for a target margin

If you know your cost and the margin you want, you can work backward:

Price = cost ÷ (1 − target margin)

To earn a 40% margin on a $15 cost: $15 ÷ 0.60 = $25. Check: ($25 − $15) ÷ $25 = 40%.

A common mistake is to add 40% to the cost instead: $15 × 1.40 = $21. That gives a 40% markup, but only a 28.6% margin.

Common mistakes

  • Dividing by cost. That's markup. It always looks bigger than margin.
  • Forgetting fees. Payment processing, marketplace fees, packaging, and shipping you cover are part of your cost per sale.
  • Leaving out your own time. If you make the product yourself, your labor is a real cost even if you don't pay yourself a wage yet.
  • Mixing time periods. Monthly revenue against yearly expenses gives a meaningless margin. Match the periods.
  • Ignoring discounts. A 20% off sale cuts much deeper into margin than 20%. On the candle above, selling at $16 instead of $20 drops margin from 60% to 50%.

What's a good profit margin?

There's no universal number. Grocery stores often run on thin margins and make it up on volume. Software and services can carry much higher margins. Compare against your own past numbers and, if you can find reliable data, against businesses like yours. Most important: your margin has to cover your overhead and leave the profit you need.

Quick reference

Cost Price Profit Margin
$10 $12.50 $2.50 20%
$10 $14.29 $4.29 30%
$10 $16.67 $6.67 40%
$10 $20.00 $10.00 50%
$10 $25.00 $15.00 60%