Profit Margin Calculator: Margin vs Markup Made Simple

Every business, from a market stall to a web shop, depends on selling things for more than they cost. But "how much profit am I making?" can be answered in two different ways, and mixing them up is one of the most common pricing mistakes small businesses make. Margin and markup use the same numbers, yet give very different percentages.

Our Profit Margin Calculator works out both from your cost and selling price. This guide explains the difference, gives you the formulas and shows how to use them to set prices with confidence.

Margin and markup: the difference

• Profit margin is profit as a percentage of the selling price. It tells you how much of each pound of sales you keep.
• Markup is profit as a percentage of the cost. It tells you how much you've added on top of what you paid.

Because the selling price is always bigger than the cost (if you're making a profit), the margin is always lower than the markup for the same product.

The formulas

• Profit = selling price − cost
• Margin = profit ÷ selling price × 100
• Markup = profit ÷ cost × 100

To set a price that gives you a target margin:

• Selling price = cost ÷ (1 − target margin)

So for a 40% margin on a £30 cost, the price is £30 ÷ 0.6 = £50.

How to use the calculator (Profit Margin Calculator)

1. Enter the cost of the item or service.
2. Enter the selling price.

The calculator shows the profit margin, the markup and the gross profit per sale. Make sure both figures either include or exclude VAT. If you're VAT-registered, use prices excluding VAT, because the VAT you collect belongs to HMRC.

A worked example

With the calculator's default figures, an item that costs £60 and sells for £100:

• Profit: £100 − £60 = £40
• Margin: £40 ÷ £100 = 40%
• Markup: £40 ÷ £60 = 66.67%

Change the cost to £75 and keep the price at £100. Profit falls to £25, the margin to 25% and the markup to 33.33%.

Converting between margin and markup

A common mistake is to add a 40% markup and believe you've made a 40% margin. In fact, a 40% markup gives a margin of about 28.6%. If your overheads assume a 40% margin, you'd fall short.

Gross margin vs net margin

The calculator works out gross margin: the difference between the selling price and the direct cost of the item. Your business also has overheads, like rent, insurance, wages, software, marketing and delivery. Net margin is what's left after those costs as well.

To estimate net margin, add up your overheads for the year and divide by the number of items you expect to sell. Add that to the cost per item, then run the calculator again. If the margin is still healthy, your prices are working.

Using margin to price your products

A few tips for small businesses:

• Know your full cost. Include delivery charges, packaging, card fees and marketplace commission, not just the price from your supplier.
• Work back from a target margin. Decide the margin you need to cover overheads and pay yourself, then set prices from there.
• Check competitors, but don't race to the bottom. A slightly higher price with better service can earn more than undercutting.
• Review regularly. Supplier prices and energy costs change. A margin that worked last year might not work now.

Margins, VAT and tax

Profit margin is about the profit on each sale. The tax you pay depends on your total profit over the year. Sole traders pay income tax and National Insurance on their profits, which you can estimate with our Self-Employed Tax Calculator. If you're VAT-registered, our VAT Calculator quickly strips VAT out of a price so you can work out the margin correctly.