How to Calculate Profit Margin for a Small Business
Profit margin tells you what percentage of revenue remains after the costs you include. Learn the formula, a worked example, and common mistakes.
What does profit margin mean?
Profit margin expresses profit as a percentage of revenue. It matters which costs you include: gross profit margin subtracts cost of goods sold, while net profit margin accounts for all expenses, including operating costs, interest and taxes.
Profit margin formula
Profit margin (%) = (profit ÷ revenue) × 100. For gross margin, profit is revenue minus cost of goods sold. For net margin, profit is net income after all expenses.
Example: a $40 product
Suppose a product sells for $40 and its cost of goods sold is $24. Gross profit is $16 and gross margin is ($16 ÷ $40) × 100 = 40%. That is not necessarily your take-home profit: advertising, payment fees, rent, and other expenses can reduce net profit.
Three common mistakes
Do not divide profit by cost when you mean margin; that calculates markup. Do not treat revenue as profit. Do not forget returns, discounts, transaction fees, or overhead when estimating what the business actually earns.
Try it with your numbers
Use the free Aldervant profit calculator to test your selling price and costs. For tracking multiple products, explore the Excel toolkit.
Examples are illustrative and use the assumptions stated. Business results vary with actual costs, taxes, and operating conditions.