What to enter
- What do you want to find?
- “Profit margins from revenue and costs” computes gross, operating and net margins. “Selling price for a target margin” tells you what to charge. “Maximum cost for a target margin” tells you the most you can spend to keep a margin at a given price.
- Revenue (sales)
- Total sales for the period, or the selling price of one unit in the maximum-cost mode.
- Cost of goods sold (COGS)
- The direct cost of producing or buying what you sold: materials, direct labor, wholesale purchase cost and similar. In the target-price mode, this is the cost per unit.
- Operating expenses (optional)
- Costs of running the business that are not part of COGS, such as rent, salaries, marketing, software and utilities.
- Other expenses (optional)
- Items below operating profit, such as interest, taxes and one-time charges.
- Target profit margin
- The share of the selling price you want to keep as profit, as a percentage.
How to read your results
Margins answer the question, “Of each dollar I sell, how many cents do I keep at this stage?” Gross margin looks only at revenue minus COGS. Operating margin also subtracts operating expenses, so it shows the profit from the core business before interest and other items. Net margin subtracts everything you entered. Each margin is a percentage of revenue. The table also shows markup on cost for comparison, because the two are often confused; they use different bases, as explained below. The bar chart shows where each dollar of revenue goes, and a warning appears if expenses exceed revenue.
In the price and cost modes, the result shows the selling price or cost that produces your target, the profit per unit and the equivalent markup on cost.
The formulas
Operating profit = gross profit − operating expenses
Net profit = operating profit − other expenses
Selling price for a target margin = cost ÷ (1 − target margin)
Maximum cost = selling price × (1 − target margin)Margins are always measured against revenue. Markup on cost is profit ÷ cost.
Worked examples
$1,000 of revenue and $600 of cost
Gross profit is $400, so gross margin is 40.0%. With no other expenses, net margin is also 40.0%. The markup on cost is 66.7%, higher than the margin because profit is compared with the smaller cost figure.
A fuller income statement. With $250,000 of revenue, $140,000 of COGS, $70,000 of operating expenses and $12,000 of other expenses, gross profit is $110,000 (44.0%), operating profit is $40,000 (16.0%) and net profit is $28,000 (11.2%).
Pricing for a target. To earn a 40% margin on a product that costs $60, divide by (1 − 0.40): the price is $100.00. Profit is $40.00. Note that $60 plus a 40% markup would be only $84, which is a 28.6% margin, so the two methods give different prices.
Working out what you can spend. If a product sells for $120 and you want a 35% margin, the most it can cost you is $78.00, leaving $42.00 of profit.
What each margin tells you
Gross margin shows whether the product or service itself is priced above its direct cost. A low gross margin leaves little room for overhead. Operating margin shows whether the business model works after the costs of running it, and it is often the fairest measure for comparing businesses of different sizes. Net margin is the bottom line after interest and other items, which is closest to what the owners keep before considering their own income and taxes.
Margins differ widely by industry. Grocery retail typically operates on thin margins, while software and professional services can earn much more, so compare your figures with similar businesses, not with a generic benchmark. Track margins over time as well. A margin that slides quietly, because suppliers raise prices or discounts creep up, is an early warning of trouble, and the calculator’s target modes show how much a price increase or cost reduction would restore.
Two cautions apply. First, revenue is not profit: a business can grow sales and still lose money if margins are too thin to cover expenses. Second, small changes in margin can be large in dollar terms at scale. Half a point of net margin on $2 million in sales is $10,000. The markup calculator converts between margin and markup, which is the most common source of pricing errors.
Assumptions and limits
This tool calculates margins from the numbers you provide, and it depends on how you define COGS and expenses. Accountants and tax rules classify costs in specific ways, for example what counts as inventory cost, so use your books or a professional’s guidance for reporting. The calculator does not compute income tax, depreciation, owner compensation or cash flow, and profit shown here is not the same as cash in the bank. Margin is measured on one period’s figures and does not forecast the future.
Frequently asked questions
What is a good profit margin?
It depends on the industry and the business model. A margin that is healthy in one field can be unsustainable in another. Compare against similar businesses and track your own trend.
What is the difference between gross, operating and net margin?
Gross margin is after COGS only. Operating margin is after COGS and operating expenses. Net margin is after all expenses entered, including interest and other items.
How do I price a product for a specific margin?
Divide the cost by one minus the target margin. A $60 cost and a 40% margin give a $100 price. Use the price mode to do it automatically.
Are margin and markup the same?
No. Margin is profit as a share of the selling price. Markup is profit as a share of cost. A 25% markup is a 20% margin. The markup calculator shows both.
Does net margin include taxes?
Only if you enter them as other expenses. The calculator does not compute taxes.