How to Calculate Profit Margin
Profit margin shows what percentage of revenue remains as profit after the costs included in your calculation. It is one of the simplest ways to compare pricing, cost efficiency, products, and business performance. Here is the formula, a worked example, and the mistakes to avoid.
Last reviewed: 2026-08-25
Profit margin formula
- Profit = Revenue − Total Costs
- Profit Margin % = Profit ÷ Revenue × 100
Start by subtracting the relevant costs from revenue. Then divide the resulting profit by revenue and multiply by 100. Revenue is the denominator because margin measures how much of each dollar of sales remains as profit.
Worked example
Suppose a business generates $10,000 in revenue and the costs included in the calculation total $7,000.
- Profit = $10,000 − $7,000 = $3,000
- Profit Margin = $3,000 ÷ $10,000 × 100 = 30%
The business earns $3,000 of profit and has a 30% profit margin. In practical terms, $0.30 of every $1.00 of revenue remains after the costs included in this calculation. You can check different revenue and cost scenarios with the Profit Margin Calculator.
Profit margin vs markup
Margin and markup are often confused because both use the same profit amount. Margin divides profit by revenue or selling price; markup divides profit by cost. If an item costs $70 and sells for $100, the $30 profit is a 30% margin but a 42.86% markup. See the full comparison in our Markup vs Margin guide or use the Markup Calculator when setting prices from cost.
What does a profit margin tell you?
Profit margin turns an absolute profit figure into a percentage, making comparisons more useful. A $50,000 profit can be strong or weak depending on how much revenue was required to generate it. Comparing margins can help you evaluate products, pricing changes, cost increases, sales channels, or different periods on a more consistent basis.
Gross margin and net margin are not interchangeable
The formula structure is similar, but the costs included can differ. A gross-style margin generally focuses on revenue minus direct cost of goods or services, while a net-style margin uses a much broader set of expenses. Always label the metric and keep the cost definition consistent when comparing results. CalcMetrio's general profit margin calculation is only as specific as the revenue and cost figures you enter.
Common profit margin mistakes
The most common errors are dividing by cost instead of revenue, leaving important costs out of one period but including them in another, and comparing margins calculated on different bases. Another mistake is assuming that a higher margin automatically means higher total profit: a lower-margin product can still generate more profit if its sales volume is much larger.
Using margin for pricing and break-even planning
Margin can help you test whether a proposed selling price leaves enough room for costs and profit. But margin alone does not tell you how many units must be sold to cover fixed costs. For that question, use the Break-Even Calculator. Combining margin with break-even analysis gives a more complete view of pricing and volume requirements.