The gist:
- Profit margin is the percentage of income remaining after costs are deducted from sales revenue.
- Generally speaking, a good profit margin is 10 percent but can vary across industries.
- To determine gross profit margin, divide the gross profit by the total revenue for the year and then multiply by 100.
- To determine net profit margin, divide the net income by the total revenue for the year and then multiply by 100.
Profitability is one of the key metrics that define the success of a company. Many small-business owners need to keep a sharp eye on their revenue and find creative ways to keep generating profit year after year. As your business grows, a reliable profit margin calculator can give you the valuable data you need to make informed financial decisions—so should your profit margins.
Our guide breaks down the details of how profit margins work, provides formulas for different types of margins, and gives real-world examples of various businesses calculating profit margins. Plus, we have a free gross profit margin calculator to help you quickly crunch your numbers.
Table of contents
- Profit margin calculator
- What is profit margin?
- How to calculate profit margins
- Profit margin examples
- How to increase your profit margin
- FAQ
Profit margin calculator
Our profit margin calculator can help you determine the selling price for your products or services so you can maximize your profit margin.
How to use this calculator:
- Enter the relevant information into the data fields of the sales margin calculator, in any order.
- The tool will calculate in real-time and display your results without the need to click a button.
- If you make any updates, the fields will adjust accordingly.
- Not all fields are mandatory.
Profit margin calculator
Enter the total amount of money your product generates.
Enter the total amount of money it takes to manufacture your product.
Enter the percentage you'd like to add to the selling price of your product.
Profit is the amount of money your business earns from the sale of your product.
Profit margin: 0%
What is profit margin?
Profit margin is the percentage of income remaining after costs are deducted from sales revenue. The higher the number, the more profit your business generates.
Here are a few key sales terms to understand when it comes to profit margins:
- Cost: The amount of money spent to create your products or services.
- Margin: The difference between the selling price of your products or services and the costs of production.
- Revenue: The total amount of income your business generates.
- Profit: The difference between the amount earned and the amount spent to produce your goods.
Sales margin vs. gross profit margin vs. gross profit
What is the sales margin in relation to other margins? Many often use the terms sales margin and gross profit margin interchangeably, as they essentially mean the same thing. These terms are also known as contribution margin, or the percentage your business earns from a sale minus the cost of goods sold (COGS). COGS includes operational costs, labor, and materials.
Gross profit is calculated similarly but expressed as a numerical value rather than a percentage.
What is a good profit margin?
Generally speaking, a good profit margin is 10 percent but can vary across industries. Though an unwritten rule, it’s understood by businesses that profit margin ranges from five percent (bad) to 20 percent (good). Using this rule, you can quickly assess how you’re doing at a glance.
Plan your future with our free sales forecast templates
Our free sales forecast templates can help you see where your business might be in a month, year, or a decade from now. Forecasting sales also enables you to track performance, make data-driven predictions, and achieve sales goals.
How to calculate profit margins (types + formulas)
The three types of profit margins to calculate for your business include gross profit margin, operating profit margin, and net profit margin. Each is defined below and accompanied by its respective formula.
Gross profit margin formula
As mentioned above, the gross profit margin is the percentage of profit left after COGS gets subtracted from net sales.
Operating profit margin formula
Operating profit margin—or earnings before interest and taxes (EBIT)—is the ratio a company uses to show its profitability compared to its core operations. The operating profit is determined by subtracting the COGS from net sales. From there, you can plug that number into the formula below to find the operating profit margin.
Net profit margin formula
Net profit margin measures the profit percentage a business produces from its total revenue. First, you must calculate your net profit by subtracting COGS, operating expenses, interest, and taxes from your total revenue. You may then use the difference as the net profit in the formula below.
Profit margin examples
Want to put your profit percentage calculator skills to the test? Here are a few scenarios across various industries to help you practice.
Example 1: Thunderpop Sox
Thunderpop Sox is a small business on Etsy that sells pop culture socks. Each pair costs the business $3 to make, and the list price is $10 per pair. On an average day, the company sells 100 pairs of socks.
For Black Friday, Thunderpop Sox wants to offer a 20 percent discount to boost sales for the holidays. If Thunderpop sells 400 shirts at the discounted price, what will its profit margin be on Black Friday?
40 percent
How’d you do? To get the answer, you need to find the original profit.
At $10 per pair minus $3 cost, the original profit is $7 per pair. This means if Thunderpop Sox sold 100 pairs, its profit margin on an average day would total $700.
On Black Friday, the socks were discounted by 20 percent, meaning each pair sold for $8. For 400 pairs of socks, that profit margin would be $3,200.
The cost to make the socks is still $3 per pair, equalling $1,200 for 400 pairs. The $3,200 revenue minus $1,200 COGS = $2,000. Using our profit margin calculator, you get a 40 percent profit margin.
Example 2: Sweat’s Gym
Sweat’s Gym offers memberships for $20 per month. If the marketing and operations costs eat up 40 percent of its revenue, what is the profit margin?
60 percent
Costs are 40 percent of each $20 membership, equalling $8. By using our profit margin calculator, you’ll see that Sweat’s Gym profits $12—a 60 percent profit margin.
Example 3: Sweetwater Pre-Owned Vehicles
Carl buys a car from Sweetwater Pre-Owned Vehicles. The original price was $20,000, and Sweetwater added a 10 percent markup. Marketing costs and labor amount to 20 percent of the original price. What is the profit margin?
82.8 percent
The revenue is $22,000 after the 10 percent markup, but costs are $4,000. The dealership will make $18,000 in profits—about an 82 percent profit margin.
How to increase your profit margin + 6 best practices
Want to boost your bottom line? Follow these best practices to increase your profit margin.
1. Streamline operations and processes
Empowering employees with streamlined operations and processes that make their jobs easier can lead to a higher profit margin. Tools that unify customer communication and data so agents don’t have to search for information can also boost efficiency and productivity. This is essential for providing a great customer experience while processing customer orders.
When a change in statewide legislation allowed for beer with a higher alcohol content to be sold in local grocery and convenience stores, Standard Beverage saw an opportunity to rapidly scale its business. With help from the easy-to-use Zendesk platform, Standard Beverage was able to keep the influx of customer information and communication organized while quickly onboarding new sales reps to hit the ground running. This led to an increase in sales revenue and higher sales margins.
2. Reduce operating costs
A great way to quickly increase profit margin is to reduce operating costs and expenses. You need to develop an effective sales plan and understand where you can effectively cut costs without hurting your business. The first step is auditing operations to identify money-saving opportunities. Some common areas include:
- Unnecessary labor or staffing costs
- Opportunities for automation
- Expensive or unused office space
- Underutilized equipment
- Unused subscriptions
- Vendor discounts
3. Build customer loyalty
Retaining customers and building customer loyalty are reliable ways to increase your profit margins. In fact, acquiring a new customer costs five times more than selling to an existing one. By providing excellent service, personalizing customer interactions, and offering perks like loyalty programs, you can create a dedicated customer base that consistently buys from you.
4. Increase average order value (AOV)
Another effective way to increase profit margin is to increase your average order value (AOV). Simply put, you want your customer to spend more per transaction. To calculate AOV, divide your total revenue by the number of orders.
Here are some ways to increase your AOV:
- Incentivize order minimums with discounts or free shipping
- Offer bundles or packages
- Add recommendations or “customers also bought” prompts to online carts
- Upsell or cross-sell products
UpStack is one company that uses Zendesk to unify customer information and communication in a single view rather than relying on spreadsheets and multiple programs. Since implementing Zendesk, UpStack increased visibility and saw more opportunities for upsells, doubling its revenue.
5. Prioritize high-margin products
To increase revenue and profit margins, identify which products or services sell the best and have the most potential to deliver the most profit for your business. Prioritize these high-margin products to maximize your revenue.
For services, consider your high-margin versus low-margin customers and focus more on the former. Dedicate your resources to these high-value clients so you can increase profitability.
Meal delivery service Freshly took this approach by concentrating on its higher-margin product: ready-to-eat bulk meals. The company targeted B2B sales rather than individual customers and quickly implemented Zendesk to handle its new sales pipeline.
6. Adjust your pricing
The most obvious solution may be the most effective. Some small businesses avoid raising prices, fearing that customers will jump ship. However, if you provide a quality product with great customer service, a bump in your pricing will rarely deter customers from making a purchase.
FAQ
Here’s how you can calculate a 10 percent profit margin:
- Change 10 percent to its decimal form of 0.10.
- Subtract 0.1 from 1, equalling 0.9.
- Divide the original price of your product by 0.9.
- This number is what your sale price should be if you want a 10 percent profit margin.
Think of it this way—a 10 percent profit margin means your business earns 10 cents for every dollar of revenue. For a 20 percent profit margin, your business earns 20 cents. Here is the calculation again, but with a 20 percent profit margin.
Here’s how you can calculate a 20 percent profit margin:
- Change 20 percent to its decimal form of 0.20.
- Subtract 0.2 from 1, equalling 0.8.
- Divide the original price of your product by 0.8.
- This number is what your sale price should be if you want a 20 percent profit margin.
The difference between margin and profit is that margin is expressed as a percentage, and profit is a numerical value. Both measure business performance, but margins are easier to compare to other businesses or industries that operate on different scales.
You can calculate a 30 percent profit margin in four simple steps:
- Change 30 percent to its decimal form of 0.30.
- Subtract 0.30 from 1, equalling 0.7.
- Divide the original price of your product by 0.7.
- This number is what your sale price should be if you want a 30 percent profit margin.
Profit margins are key performance indicators (KPIs) that provide important information about how your business performs and how much profit your business generates. These KPIs will tell you which products or services aren’t profitable so you can make informed business decisions. Profit margins should always be rising to keep your business growing.
