How it works
Gross margin = (revenue − cost of goods sold) ÷ revenue × 100.
A worked example
Revenue of 1,000 and cost of goods sold of 600 gives 400 gross profit and a 40% margin.
What to keep in mind
Use matching periods and a consistent treatment of tax. Gross profit excludes overheads, interest and income taxes. This is not net profit.
Profit margin formula
Gross margin = (revenue − cost of goods sold) ÷ revenue × 100. Selling an item for £50 that cost £35 gives £15 of gross profit and a 30% margin.
Margin versus markup
Margin compares profit with the selling price. Markup compares profit with the cost. A product that costs £20 and sells for £40 has a 100% markup but a 50% margin.
Gross margin versus net margin
Gross margin only takes away the direct cost of the goods. Net margin also takes away overheads such as rent, wages, marketing and tax, so it is always lower.
Frequently asked questions
What is a good profit margin?
It varies by industry. Retail gross margins are often 25% to 50%, while software and services can be much higher.
How do I find the price for a target margin?
Divide the cost by (1 − target margin ÷ 100). For a 40% margin on a £30 cost, the price is £30 ÷ 0.6 = £50.
Is margin the same as markup?
No. Margin divides profit by revenue; markup divides profit by cost.
For general information and planning, not personalised financial or tax advice. Verify important decisions with a qualified adviser.