How to calculate profit margin

Margin shows how much of each sale is left after the direct cost of the item or service.

The profit-margin formula

Profit margin = (selling price − cost) ÷ selling price × 100

For example, if an item sells for £100 and costs £60, the profit is £40. £40 ÷ £100 × 100 = a 40% profit margin.

Margin versus markup

Margin uses the selling price as its base. Markup uses cost as its base. In the example above, £40 profit on a £60 cost is a 66.67% markup, but a 40% margin. They are not interchangeable.

How to set a selling price from a target margin

Selling price = cost ÷ (1 − target margin as a decimal). A £60 cost with a target 40% margin needs a £100 selling price: £60 ÷ 0.60.

Use the free margin calculator

What should be included in cost?

Include direct materials, labour, delivery, payment fees and any other direct expense needed to fulfil that sale. Track overheads separately when calculating net profit.

Frequently asked questions

Is VAT part of profit margin?

Businesses registered for VAT normally calculate commercial margin using VAT-exclusive figures, because VAT collected is not revenue. Ask an accountant for advice on your specific tax position.

What is a good profit margin?

It varies materially by sector, risk and overheads. Compare like-for-like businesses and calculate consistently before making decisions.