How to Calculate Profit Margin: Formula & Example

The core formula

Gross margin uses cost of goods sold, operating margin adds operating expenses, and net margin also reflects further items such as financing and taxes. A figure labeled simply “margin” is ambiguous without a cost definition.

Worked example

$10,000 revenue − $6,500 cost = $3,500 profit and 35% margin.

How to calculate profit margin

1. Choose the margin definition first: gross, operating or net.
2. Use revenue and the matching cost definition from the same period.
3. Subtract cost from revenue to calculate profit under that definition.
4. Divide profit by revenue and multiply by 100 to express margin as a percentage.

Gross, operating and net margin use different cost layers

Gross margin typically focuses on revenue minus direct cost of goods or services. Operating margin includes operating expenses, while net margin includes the broader set of expenses used to arrive at net profit.

Because the numerator changes with the cost definition, compare like with like. A gross margin should not be compared with another period’s net margin or with a competitor figure that uses a different accounting definition.

Common mistakes

• Dividing profit by cost, which calculates markup rather than margin.
• Mixing monthly revenue with annual costs.
• Changing the cost definition between products or periods without labeling the difference.

Frequently asked questions