Revenue can include
- Single product selling price
- Total invoice value before tax
- Category or channel sales for a period
Guide
How to Calculate Profit Margin
Profit margin tells you how much of the selling price stays in the business after direct cost is covered. It is one of the cleanest ways to judge whether a product, quote, or order is commercially healthy.
Step 01
Start with revenue and direct cost
The two numbers you need first are revenue and direct cost. Revenue is the selling price or total sales value. Direct cost is the cost tied to delivering that product, order, or service.
Direct cost can include
- Unit cost of goods sold
- Contractor or delivery cost
- Per-order fulfillment or payment fees
Step 02
Use the profit margin formula
First calculate profit. Then divide profit by revenue. That second step is what makes margin different from markup.
Profit margin = (Revenue - Cost) / Revenue × 100
If revenue is $89 and cost is $62, profit is $27. Divide $27 by $89 and the margin is 30.34%.
Step 03
Do not confuse margin with markup
Margin divides profit by revenue. Markup divides profit by cost. That is why markup is usually higher than margin even though both come from the same sale.
Margin
Best when you want to judge commercial quality in reporting terms.
Margin = Profit / Revenue × 100
Markup
Best when you are building price from a known cost base.
Markup = Profit / Cost × 100
Step 04
Clean up tax before you judge margin
If the visible price includes VAT or sales tax, remove the tax first. Margin should be calculated on the commercial value of the sale, not on the tax money passing through it.
Use profit margin when
- You review products, quotes, clients, or channels.
- You want to compare offers with a common percentage.
- You need to see whether pricing is strong enough to scale.
Useful next step
Once the formula is clear, run real numbers through the calculators so the percentage stops being theoretical.
FAQ
Common questions about profit margin
What is the difference between profit margin and gross profit?
Gross profit is the money left after direct cost. Profit margin is that profit expressed as a percentage of revenue.
Can profit margin be negative?
Yes. If direct cost is higher than revenue, profit is negative and margin will be negative too.
Should VAT or sales tax be included in profit margin?
Usually no. If the selling price is tax-inclusive, back the tax out first and calculate margin on the net revenue amount.
Next steps
Turn the formula into a real margin check
Run the price through the calculators, compare it with markup logic, and clean tax out before you trust the final percentage.