Pricing & Profit formula
Profit Margin Formula
Calculate the percentage of selling price that remains after subtracting cost.
The equation
How the formula works
Formula
Profit margin (%) = (Selling price − Cost) ÷ Selling price × 100
What each term means
- Selling price
- Revenue received for one item, order, or period.
- Cost
- The cost associated with producing or delivering that sale.
- Profit
- Selling price minus cost before any costs not included in the calculation.
How to calculate it
- 1
Subtract cost from selling price to find profit.
- 2
Divide profit by selling price.
- 3
Multiply by 100 to express the result as a percentage.
How to interpret the result
A 40% margin means $0.40 of each revenue dollar remains after the cost included in the calculation.
The result is only as broad as the costs entered. Using cost of goods sold gives a gross margin; including all operating costs produces a different measure.
Profit margin versus markup
Margin divides profit by selling price. Markup divides the same profit by cost. A $40 profit on $60 cost and $100 revenue is a 40% margin but a 66.67% markup.
Assumptions and limitations
- Selling price is greater than zero.
- Cost and selling price cover the same unit, order, or reporting period.
- Taxes, discounts, refunds, and overhead are included only when they appear in the entered figures.
Common mistakes
- Dividing profit by cost, which calculates markup rather than margin.
- Comparing margins built from different definitions of cost.
- Treating gross margin as net profit margin.
Frequently asked questions
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