Calculate profit margin, markup, and selling price. Essential tool for pricing strategies and profitability analysis.
Profit margin is a financial metric used to assess the profitability of a business or a specific product. It measures how much out of every dollar of sales a company actually keeps in earnings. For example, a 20% profit margin means that for every $100 of revenue, the company makes $20 in profit.
Understanding your profit margin is essential for setting prices, evaluating business performance, and ensuring long-term sustainability.
While both margin and markup use cost and revenue in their calculations, they represent different concepts and percentages:
For example, if a product costs $80 and sells for $100, the profit is $20.
To calculate profit margin and markup, you can use the following formulas:
Because margin is calculated with the selling price as the denominator (which is a larger number), while markup is calculated with the cost as the denominator (which is a smaller number). Therefore, the margin percentage will always be lower than the markup percentage for the same profit amount.
A "good" profit margin varies significantly by industry. For example, retail businesses often have lower margins (5-10%), while software companies can have very high margins (70-80%).
Yes, if the cost of goods sold is higher than the selling price, the business is making a loss, and the profit margin will be negative.