What is the formula for profit margin?

Profit Margin (%) = (Revenue − Cost) ÷ Revenue × 100. For example, if you sell something for £100 and it cost £60 to produce, your profit margin is (£100 − £60) ÷ £100 × 100 = 40%. This is the gross profit margin — it does not account for overhead, operating expenses, tax, or interest.

What is the difference between profit margin and markup?

Margin is profit as a percentage of selling price (revenue). Markup is profit as a percentage of cost. A product costing £80 and selling for £100 has a profit of £20 — a margin of 20% (20/100) but a markup of 25% (20/80). Confusing the two leads to systematic underpricing. Always clarify which one you are using.

What is a good profit margin for a small business?

There is no universal answer — it depends on the industry. Retail typically achieves 5–15% net margin. Service businesses (consulting, freelancing, agencies) can reach 20–40%. Restaurants average 3–9%. The most useful benchmark is your industry's average, not a cross-sector figure. Gross margins above 40% give most businesses enough room to cover operating costs and remain profitable.

How do I calculate the selling price from a desired margin?

Use the formula: Selling Price = Cost ÷ (1 − Target Margin). For a 30% target margin on a product costing £70: Price = £70 ÷ 0.70 = £100. Do not add the percentage directly to cost — that gives you markup, not margin, and will result in a lower margin than intended.

How to Calculate Profit Margin on Any Product or Service

How to Calculate Profit Margin: The Core Formula#

Profit margin tells you what percentage of revenue is left after paying costs. The formula is: Profit Margin = (Revenue − Cost) ÷ Revenue × 100. A worked example: you sell a product for £50 and it costs you £35 to produce. Profit = £50 − £35 = £15. Margin = £15 ÷ £50 × 100 = 30%. That means for every £1 of sales, you keep 30p as profit before any further expenses. This is the gross profit margin — the cleanest single measure of product-level profitability and the starting point for all pricing decisions.

Gross Margin vs Net Margin vs Operating Margin: The Three Levels#

Profit margin is not one number — it is a stack of three progressively more complete measures:

Gross margin: (Revenue − Cost of Goods Sold) ÷ Revenue. Covers only direct production costs (materials, direct labour, manufacturing). Ignores overhead, salaries, marketing, and tax.
Operating margin: (Revenue − COGS − Operating Expenses) ÷ Revenue. Includes all costs of running the business: rent, salaries, software, marketing. Excludes interest and tax. Shows how efficiently the business operates.
Net margin: (Revenue − All Expenses including interest and tax) ÷ Revenue. The bottom line. What the owners actually take home.

A business can have a 60% gross margin and a 5% net margin — that gap represents the cost of running the operation. Tracking all three reveals where money disappears.

Margin vs Markup: The Most Common Pricing Confusion#

Margin and markup both describe the relationship between cost and price, but they use different bases — and confusing them leads to systematic underpricing. Markup is calculated on cost: Markup% = Profit ÷ Cost × 100. Margin is calculated on revenue: Margin% = Profit ÷ Revenue × 100. A product that costs £40 and sells for £50 has a markup of 25% but a margin of 20%. If you target a 30% margin but apply a 30% markup, your actual margin is only 23.1% — a persistent shortfall that compounds across thousands of transactions. The markup calculator converts between the two so you can set prices with precision.

Industry Benchmarks: What Is a Good Profit Margin?#

"Good" margin varies enormously by industry because cost structures differ:

Grocery retail: 1–5% net margin. Extremely thin, driven by volume and competition.
General retail (fashion, electronics): 5–15% net margin. 40–60% gross margin is typical before operating costs.
Restaurants: 3–9% net margin. High COGS (food costs = 28–35% of revenue) and labour costs compress margins severely.
Software as a Service (SaaS): 15–30%+ net margin once scaled. Low marginal cost of software delivery enables high margins.
Professional services (consulting, law): 20–40% net margin. Revenue is primarily labour, so margins reflect billing rate vs cost of talent.

Compare your margin to your direct competitors, not to a cross-industry average.

Setting Prices from a Margin Target: Working Backwards#

If you know your cost and your target margin, you can calculate the required selling price directly: Selling Price = Cost ÷ (1 − Target Margin). Examples:

Cost £40, target margin 30%: Price = £40 ÷ 0.70 = £57.14
Cost £100, target margin 50%: Price = £100 ÷ 0.50 = £200
Cost £8, target margin 20%: Price = £8 ÷ 0.80 = £10

This formula is the correct way to price from a margin target. The common mistake is adding the margin percentage directly to cost (which gives markup, not margin). Use the profit margin calculator to compute any of cost, price, or margin when you know the other two.

Why Margins Compress Over Time and How to Protect Them#

Profit margins erode naturally for several reasons: supplier cost inflation, competitive price pressure, rising labour costs, and customer acquisition costs increasing as the easiest customers have already been won. Strategies that reliably protect margins include:

Annual price reviews: Raise prices in line with cost increases rather than absorbing them. Small, regular increases are far less disruptive than large infrequent ones.
Product mix management: Identify and promote your highest-margin products. Not all revenue is equal.
Cost negotiation: Volume discounts and supplier renegotiation can preserve gross margin without touching prices.
Operational efficiency: Reducing waste, automating repetitive tasks, and reducing returns all improve net margin without requiring price increases.

Using the Free Profit Margin Calculator#

The profit margin calculator at allio.tools covers three common calculations: (1) enter cost and revenue to find your margin; (2) enter cost and target margin to find the required selling price; (3) enter revenue and margin to find the implied cost. Results display as both a percentage margin and absolute profit in your input currency. The tool also shows markup alongside margin so you can see both figures at once and avoid the confusion between the two. Use it at the product level to verify individual item profitability, or at the business level using monthly revenue and total cost figures.