Profit Margin Calculator

How it works

Profit margin expresses profit as a percentage of revenue. It tells you how much of each pound of revenue you keep after covering the cost of the product or service. A higher margin means more profit relative to the selling price.

The formula

Why this works: Margin uses revenue as the base because it answers the question of how much profit is retained from each pound of sales. Dividing by revenue (not cost) gives the proportion of selling price that becomes profit, which is the figure most useful for comparing products or monitoring the health of a business.

Worked examples

What good margins look like in UK businesses

Gross profit margin varies enormously by sector in the UK. Understanding typical ranges helps you benchmark whether your pricing is sustainable. Food and grocery retail operates on thin gross margins of around 25-35% and net margins of just 2-5% after overheads. Clothing retail often achieves gross margins of 50-60% but net margins of 10-15% once rent, staffing, and returns are accounted for. Hospitality businesses see high gross margins on individual items (coffee can be 70-80% gross) but net margins of 5-10% after labour and premises costs.

Professional services and digital businesses tend to achieve the highest margins. Freelancers and consultancies often run gross margins of 70-90% on direct project costs, though overheads reduce net margins substantially. Software and SaaS businesses can sustain very high gross margins because cost of goods sold is low, but this rarely translates directly to high net profit in early-stage businesses.

The gross margin this calculator produces is only the starting point. Deduct rent, utilities, salaries, marketing, and any platform or merchant fees to arrive at your true net margin. A 40% gross margin business covering £150,000 in annual fixed overheads on £300,000 revenue has a 40% gross margin but only a 10% net margin. Knowing both figures is essential for setting prices that make the business genuinely viable.

When to use this

Profit margin calculations are central to business pricing and financial review:

• Product line profitability: A retailer sells three product categories. Category A achieves 45% margin, category B 28%, and category C 18%. Calculating margin across the range reveals which lines are carrying the business and which are dragging down overall profitability, informing decisions about ranging and pricing.
• Quoting for jobs: A builder preparing a quote for a £12,000 kitchen project with £8,400 in materials and subcontractor costs achieves 30% gross margin. If overheads require at least 20% net margin, the 10% cushion may be too thin. Running this calculation before submitting avoids accepting work that doesn't cover costs.
• Supplier negotiations: An online retailer buying product at £32 and selling at £55 achieves 41.8% margin. If the supplier raises cost to £36, margin falls to 34.5%. Knowing the margin impact of a £4 cost increase gives a clear basis for negotiating or adjusting the selling price.
• Reviewing VAT-registered pricing: For VAT-registered businesses, the selling price to check against should be the ex-VAT amount, not the gross price. A £120 sale including 20% VAT represents only £100 in revenue for margin calculation purposes.

Understanding the result

Gross margin tells you what proportion of each pound of revenue remains after covering the direct cost of the product or service. It does not account for rent, salaries, utilities, or any other overhead. A high gross margin can mask a loss-making business if fixed costs are large relative to revenue.

Margin and markup are related but not interchangeable. If your gross margin is M%, the equivalent markup is M/(1-M) x 100%. A 40% margin requires a 66.7% markup. A 50% margin requires a 100% markup. Setting prices using a markup target and monitoring performance using a margin figure is standard practice, but the two numbers will always differ.

Related concepts

➡ To find the markup percentage that delivers a specific margin target, the markup calculator shows the selling price from a cost and markup percentage. ➡ If your selling prices include VAT, the VAT calculator strips the tax from a gross price to give the net revenue figure for margin calculation. ➡ To see how your margin has improved or declined between two periods, the percentage increase calculator shows the rate of growth between any two figures.

How to do this in Excel

Put the revenue (selling price) in A1 and the cost in B1. The formula subtracts cost from revenue, divides by revenue, and multiplies by 100 to give the margin percentage. For the profit amount, use =A1-B1. To calculate what markup was applied, use =(A1-B1)/B1*100.

How to do this without a calculator

Subtract the cost from the selling price to find the profit. Divide the profit by the selling price and multiply by 100. For a £120 selling price with £72 cost: profit = £48, margin = 48/120 x 100 = 40%. For a quick check, find what proportion the profit is of the selling price. If profit is roughly a third of the selling price, the margin is around 33%. If profit is about half the selling price, the margin is around 50%.

Real world uses

• Checking whether a product line is profitable enough to justify stocking in a retail store.
• Comparing the margin on different service packages offered by a consultancy or agency.
• Reviewing the gross margin on a building or trade job before submitting a quote.
• Monitoring monthly sales margin for a small e-commerce business to track financial health.
• Evaluating a new wholesale supplier by comparing the potential margin against existing stock.

Common mistakes

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