How profit margin is calculated
- Profit = selling price − cost. Sell at $100 something that cost you $60 and you keep $40.
- Margin % = profit ÷ selling price × 100. That $40 profit is 40% of the $100 price — margin measures profit as a share of what the customer pays.
- Markup % = profit ÷ cost × 100. The same $40 profit is 66.7% of the $60 cost. Markup and margin are two views of the same money.
Working backwards from a target margin instead? Set your selling price precisely with the markup calculator, then bill the client with the invoice generator.
Margin to markup: the conversion table
Because margin and markup describe the same profit against different bases, every margin corresponds to exactly one markup. The relationship is not linear: a 40% margin is a 66.7% markup, but a 70% margin is a 233% markup. As margin approaches 100%, the equivalent markup climbs toward infinity.
| Target margin | Equivalent markup | Price = cost × | Example: $60 cost |
|---|
| 10% | 11.1% | 1.111 | $66.67 |
| 20% | 25.0% | 1.250 | $75.00 |
| 25% | 33.3% | 1.333 | $80.00 |
| 30% | 42.9% | 1.429 | $85.71 |
| 33.3% | 50.0% | 1.500 | $90.00 |
| 40% | 66.7% | 1.667 | $100.00 |
| 50% | 100.0% | 2.000 | $120.00 |
| 60% | 150.0% | 2.500 | $150.00 |
| 66.7% | 200.0% | 3.000 | $180.00 |
| 70% | 233.3% | 3.333 | $200.00 |
| 75% | 300.0% | 4.000 | $240.00 |
| 80% | 400.0% | 5.000 | $300.00 |
The "33.3% margin = 50% markup" row is the keystone rule some retailers use as a shorthand for doubling cost. To read the table the other way — you know the markup and want the margin — use the markup calculator, which shows both figures for any cost and price pair.
Three worked examples
Example 1 — retail resale
You buy a tool wholesale at $42 and price it at $70. Profit is $28. Margin: $28 ÷ $70 = 40%. Markup: $28 ÷ $42 = 66.7%. If you told a colleague "we mark this up 40%" you would be understating the true markup by 26.7 points — and if your target had been a 40% margin, the correct price is $70, which is exactly where you are.
Example 2 — service business
An agency bills a project at $8,000. Direct cost — contractor hours and software licences — comes to $3,200. Profit is $4,800, so gross margin is 60%. At a 60% margin the markup equivalent is 150%: the agency charges 2.5× its direct cost. That multiple is normal for professional services because the price also has to fund the staff and overhead that are not in the direct cost.
Example 3 — the discount trap
The same $8,000 project at 60% margin: the client asks for 20% off. New price $6,400, direct cost unchanged at $3,200, profit $3,200 — margin falls from 60% to 50%. The 20% discount consumed a third of the profit. The general rule: every dollar of discount comes straight out of profit, so the deeper the margin, the harder the percentage hit. Model the promotion with the discount calculator before you agree to it.
The break-even discount rule
A business with a 40% margin can discount by at most 40% before profit hits zero — because the maximum discount is exactly the margin expressed as a share of price. At a 40% margin, a 20% discount cuts profit in half, not by 20%. This is why shallow-margin businesses (groceries at 20-30%) cannot run deep promotions and survive, while high-margin software can.
Typical gross margin ranges by industry
Published benchmark surveys put typical gross margins roughly in these bands. Treat them as orientation, not targets — within any industry, individual businesses vary widely with scale, channel and business model. For current sector-level data, the U.S. Census Bureau's Quarterly Financial Report and the SBA's industry statistics are the primary public sources.
| Business type | Typical gross margin | Why it sits there |
|---|
| Grocery / food retail | 20–30% | High volume, perishable stock, price competition |
| General merchandise retail | 25–45% | Keystone pricing traditions, mixed categories |
| Restaurants (food only) | 60–75% | Food cost 25–35% of menu price; labour sits below the gross line |
| Construction / trades | 25–45% | Materials pass-through compresses the percentage |
| Consulting / agencies | 50–70% | Time sold at multiples of direct cost |
| Software / SaaS | 70–90% | Near-zero marginal cost per additional customer |
Notice how the same 40% margin that is healthy for a retailer is weak for a software company. The only benchmark that matters for decisions is your own trend line, month over month — which is what this calculator is for.
FAQ
What is the difference between margin and markup?
Margin divides profit by the selling price; markup divides it by cost. A $60 item selling for $100 has a 40% margin but a 66.7% markup — identical profit, different bases. Mixing them up is the most common pricing mistake in small business.
What is a good profit margin?
Industry-dependent. Grocery and general retail often run 20–30% gross margins, consultancies and agencies commonly exceed 50%, and software gross margins can pass 70%. Benchmark against your own sector, not a universal target.
Can margin exceed 100%?
Never — profit cannot exceed the entire selling price, so margin tops out at 100%. Markup has no ceiling because it is measured against cost.
Is margin the same as profit?
Profit is the absolute dollars left after costs; margin expresses those dollars as a percentage of revenue. Two businesses can both earn $40,000 profit, but the one on $100,000 revenue (40% margin) is structurally healthier than the one on $500,000 (8%).
Gross margin vs net margin?
Gross margin counts only the direct cost of the goods or service. Net margin also subtracts rent, salaries, software, taxes and every other operating cost. This calculator works at the gross level — net margin needs your full expense picture.
How do I price for a target margin?
Divide cost by (1 − target margin). To hold a 40% margin on a $60 cost: $60 ÷ 0.60 = $100 selling price. Every extra point of margin raises the required price faster as you approach 100%.
Why did my margin shrink when I offered a discount?
Because the discount comes straight off the profit. Cutting 10% off a $100 item with a 40% margin leaves $30 profit on a $90 price — a 33.3% margin. Model promotions with the discount calculator before announcing them.
What is contribution margin, and how is it different?
Contribution margin subtracts only the variable cost per unit — goods, shipping, payment fees — and ignores fixed costs such as rent and salaries. It answers "does each sale help cover my fixed costs?" while gross margin answers "is the product priced above its direct cost?". For most single-product decisions they coincide; they diverge when fixed costs are allocated into the unit cost.
My margin is fine but I still run out of cash — why?
Margin is profit at the moment of sale, not cash in the bank. If you invoice on Net 30 terms, the profit from a sale made today arrives next month — or never, if the invoice goes unpaid. Track the cash side with the invoice due date calculator and set terms that keep money moving.
How does margin interact with sales tax?
Sales tax is collected on behalf of the state and never appears in your profit, so compute margin on the pre-tax price only. If your $100 price includes a $7 tax, the true selling price is $93.46 — entering the tax-inclusive number as price overstates margin. Separate the two before comparing against industry benchmarks.
Sources and standards
Margin formulas and all example figures on this page were last verified on September 19, 2026.