💹 Margin Calculator
Margin and markup are different numbers and confusing them is one of the most expensive mistakes in small business pricing. Enter any two of cost, price and margin and this gives the rest.
Margin against markup, and the mix-up that quietly loses money
Margin and markup use the same two numbers and divide them the other way round. Margin divides profit by the selling price; markup divides profit by the cost. A 50% markup is a 33.3% margin, and treating them as the same number is one of the most common and most expensive errors in small business pricing.
Margin = (Price − Cost) / Price × 100
Markup = (Price − Cost) / Cost × 100
Margin can never exceed 100%, because profit cannot exceed the price it is part of. Markup has no ceiling: a $10 item sold for $100 carries a 900% markup and a 90% margin.
The conversion table worth memorising
| Cost | Price | Markup | Margin |
|---|---|---|---|
| $80 | $100 | 25.0% | 20.0% |
| $75 | $100 | 33.3% | 25.0% |
| $66.67 | $100 | 50.0% | 33.3% |
| $50 | $100 | 100.0% | 50.0% |
| $40 | $100 | 150.0% | 60.0% |
| $25 | $100 | 300.0% | 75.0% |
The practical trap: a business that needs a 40% margin and applies a 40% markup instead ends up with a 28.6% margin — eleven and a half points of profit short on every sale. On $500,000 of revenue that is around $57,000 a year, and because the arithmetic is internally consistent nothing ever looks wrong.
Price for a target margin = Cost / (1 − Margin)
To hit a 40% margin, divide the cost by 0.60, do not multiply by 1.40. A $60 item needs to sell at $100, not $84. The difference is sixteen dollars a unit, every unit.
Gross, operating and net margin
The word margin on its own usually means gross margin: revenue minus the direct cost of what was sold. Operating margin then subtracts the costs of running the business — rent, salaries, marketing. Net margin subtracts everything else, including interest and tax. The three can be wildly different and describe different questions.
| Line | Amount | Margin |
|---|---|---|
| Revenue | $500,000 | — |
| Cost of goods sold | $300,000 | — |
| Gross profit | $200,000 | 40.0% |
| Operating expenses | $140,000 | — |
| Operating profit | $60,000 | 12.0% |
| Interest and tax | $22,000 | — |
| Net profit | $38,000 | 7.6% |
A 40% gross margin that leaves 7.6% at the bottom is normal for retail. The gap is where the business actually lives, and it is the reason a healthy gross margin is not evidence of a healthy business. For the return the owner earns on capital put in, see the ROI calculator.
Discounts cost more margin than they look like
A discount comes entirely out of profit, not out of revenue proportionally, so its effect on margin is amplified by whatever the margin was to begin with. On a 40% margin, a 10% discount removes a quarter of the profit on that sale. On a 20% margin, the same 10% discount removes half of it.
| Discount | 40% margin | 25% margin | 15% margin |
|---|---|---|---|
| 5% | +14% | +25% | +50% |
| 10% | +33% | +67% | +200% |
| 15% | +60% | +150% | Impossible |
| 20% | +100% | +400% | Impossible |
On a 15% margin, a 15% discount sells at cost: no volume can recover it. This is why discounting is dangerous in low-margin businesses and why the discount calculator is worth running from the seller's side before a sale is announced, not just the buyer's.
A worked example
A maker buys components for $24 and wants a 45% margin. The price is $24 / 0.55 = $43.64, call it $43.99 — a markup of 83.3%. A retailer then asks for 40% off list to stock it, leaving $26.39, which is a margin of 9.1%. Rather than refuse outright, the maker quotes a trade price of $28.99 for orders above fifty units: that is a 17.2% margin on a volume order with no retail overhead, and the retailer still takes a 34% margin at the $43.99 list price. Both sides can live there; the original 40%-off request could not.
If the number here raised another question, it is probably one of these: the discount calculator or the roi calculator.
Frequently Asked Questions (FAQs)
What is the difference between margin and markup?
Margin divides profit by the selling price; markup divides the same profit by the cost. A 50% markup is a 33.3% margin. Margin cannot exceed 100%; markup has no upper limit.
How do I price for a target margin?
Divide the cost by one minus the margin as a decimal. For a 40% margin on a $60 cost, that is $60 / 0.60 = $100. Multiplying by 1.40 is the common mistake and gives $84, which is a 28.6% margin.
Which should I use to set prices?
Margin, because it relates directly to the revenue and profit figures in your accounts. Markup is convenient for quick pricing off a cost list, but set the markup from your target margin rather than treating the two as interchangeable.
What is a good gross margin?
It varies enormously by industry: grocery retail runs around 25%, restaurants around 60% to 70% on food, software above 80%. Compare against your own sector and your own trend rather than a universal benchmark.
Why does a small discount cost so much profit?
Because the discount comes entirely out of the profit. On a 40% margin, a 10% discount removes a quarter of the profit on that sale and needs a third more volume to break even. On a 15% margin, a 15% discount sells at cost.
Is margin calculated before or after tax?
Gross margin is before tax and before operating expenses: it is revenue minus the direct cost of goods sold. Net margin is after everything, including interest and tax. Always check which one a quoted figure refers to.
Can margin be negative?
Yes, when the selling price is below cost. It happens deliberately in loss-leader pricing and clearance, and accidentally when costs rise and prices are not revisited. A persistently negative gross margin means every additional sale increases the loss.