Profit Margin Calculator

What this calculator tells you

Profit margin shows how much of each unit of revenue a business keeps as profit after its costs. It is one of the most useful measures of business health, because it lets you compare a small shop with a large company, or one year with another, on the same basis.

This calculator takes revenue and total costs and works out the profit and the profit margin. It is a simple view, and it sits alongside other measures such as gross margin and operating margin, which separate different types of cost.

How the margin is worked out

Profit equals revenue minus total costs. The profit margin equals profit divided by revenue, multiplied by 100. A margin of 25% means that for every 100 of revenue, the business keeps 25 as profit after all its costs. The margin is always expressed against revenue, not against the cost base, which is a common source of confusion.

A worked example

Suppose a business earns 200,000 of revenue in a year and spends 150,000 on all its costs. The profit is 50,000. Dividing 50,000 by 200,000 gives 0.25, so the profit margin is 25%. A mark-up of 50% on the costs would give the same profit, but it would describe a different measure, so keep the two concepts separate when pricing.

Margin and markup are not the same

Markup is the profit as a percentage of cost, while margin is the profit as a percentage of revenue. A product bought for 100 and sold for 125 has a markup of 25% and a margin of 20%. Pricing decisions often start from a markup, but the profit that remains is better judged against the margin. Confusing the two can lead to prices that look right but leave less profit than expected.

Limits of the calculation

The result depends on which costs are included. A total cost figure that leaves out wages, rent or depreciation will overstate the margin. Taxes are usually excluded from profit before tax, and one-off items, such as a sale of equipment, can distort the figure for a single period. Compare margins across similar businesses and over several periods, rather than judging one figure in isolation.

Using margin for pricing decisions

Set a target margin before setting the price, then check whether the price achieves it after discounts, commissions and returns. A product that looks profitable on the list price may fall below target once these are deducted. Track the margin for each product or service, not just the business as a whole.

A margin figure can also hide a volume problem. A high-margin product that sells very few units may contribute less profit than a lower-margin product that sells well. Review both margin and volume together.

Using the result

Use the margin to test pricing, to see how much a change in costs affects profit, and to decide whether a product or service is worth its share of overhead. A small change in the margin can have a large effect on profit when volume is high, so track the figure over time and set a target that reflects your industry.

Checking the margin over time

A single period can be distorted by seasonal sales, one-off costs or the timing of supplier bills. Calculate the margin over several periods, such as the last four quarters, and look at the trend. A margin that falls steadily points to rising costs or discounting that has become routine, which may need a pricing review.