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How to use this calculator#
- Put everything variable into the costUnit cost means materials, manufacturing, inbound freight, duty and payment processing fees. Leaving out the 2.9% card fee inflates the margin on every product you sell and quietly misprices the whole catalogue.
- Enter the price the customer actually paysUse the net price after any standing discount and, in VAT or GST countries, exclusive of tax. VAT is not your revenue — including it in the selling price overstates margin by the full rate.
- Switch to target mode to set a priceEnter your cost and the margin you need, and the calculator divides rather than multiplies. This is the step where most small businesses lose money by reflex.
- Compare margin against markup deliberatelySuppliers quote markup, accountants report margin, and the same deal looks very different in each. A 50% markup is only a 33.3% margin — check which word the number in front of you is attached to.
The formula#
Gross margin, markup and target pricing
Margin = (P − C) ÷ P × 100 Markup = (P − C) ÷ C × 100 P = C ÷ (1 − m) Margin = Markup ÷ (1 + Markup)
- P
- Selling price, excluding VAT or sales tax
- C
- Unit cost — all direct costs of getting one unit sold
- m
- Target margin as a decimal: 40% becomes 0.40
- Margin
- Profit as a percentage of the selling price. Capped at 100%
- Markup
- Profit as a percentage of cost. No upper limit
The target-price formula divides by (1 − m), it does not multiply by (1 + m). Multiplying a $60 cost by 1.40 gives $84, which is a 28.6% margin rather than the 40% intended — an error of more than eleven points of margin on every unit, invisible until the year-end accounts.
Margin and markup are not the same thing#
Margin expresses profit as a share of the selling price; markup expresses it as a share of cost. Buy at 60 and sell at 100 and you have a 40% margin but a 66.7% markup. The formulas are margin = (price - cost) / price and markup = (price - cost) / cost. Mixing them up is the classic small-business pricing error and it always leaves money on the table.
To hit a target margin you divide rather than multiply: price = cost / (1 - margin). A 40% margin on a 60 cost needs a price of 100, not 60 x 1.4 = 84, which would deliver only a 28.6% margin. The gap widens fast — a 50% target margin requires a 100% markup, and a 60% target requires 150%.
Gross, operating and net margin#
Gross margin counts only direct costs: materials, manufacturing, inbound shipping and payment processing. Operating margin then deducts rent, salaries, software and marketing, and net margin strips out interest and tax as well. A perfectly healthy 45% gross margin can still end at a 3% net margin once overheads land, which is why gross figures alone never prove that a business works.
What good looks like by sector#
Benchmarks vary enormously. Grocery retail survives on 2-3% net margins with huge volume, restaurants target 60-70% gross on food but only 3-6% net, software routinely exceeds 80% gross, and general retail leans on keystone pricing at 100% markup. Compare against your own sector — and remember a discount comes straight out of profit: at a 30% margin, 10% off surrenders a third of your gross profit.
Worked examples#
Margin and markup on the same product
A product costing $60 that sells for $100.
- Gross profit = 100 − 60 = 40
- Margin = 40 ÷ 100 × 100 = 40.00%
- Markup = 40 ÷ 60 × 100 = 66.67%
- Cross-check: margin = markup ÷ (1 + markup) = 0.6667 ÷ 1.6667 = 40.00%
A 40% margin and a 66.7% markup — the same $40, described from two different denominators.
Pricing to a 55% target margin
A product costing $22 that needs to carry a 55% gross margin.
- P = 22 ÷ (1 − 0.55) = 22 ÷ 0.45 = 48.89
- Gross profit = 48.89 − 22 = 26.89
- Equivalent markup = 26.89 ÷ 22 × 100 = 122.2%
- The wrong method: 22 × 1.55 = 34.10
- That price gives a margin of (34.10 − 22) ÷ 34.10 = 35.5%
$48.89, not $34.10. The multiply-instead-of-divide error would have cost 19.5 points of margin — on a product priced to survive on 55%, that is most of the profit.
Reference tables#
| Gross margin | Equivalent markup | Price = cost × |
|---|---|---|
| 10% | 11.1% | 1.111 |
| 15% | 17.6% | 1.176 |
| 20% | 25.0% | 1.250 |
| 25% | 33.3% | 1.333 |
| 30% | 42.9% | 1.429 |
| 40% | 66.7% | 1.667 |
| 50% | 100.0% | 2.000 |
| 60% | 150.0% | 2.500 |
| 70% | 233.3% | 3.333 |
| 75% | 300.0% | 4.000 |
| 80% | 400.0% | 5.000 |
Margin can never exceed 100% because profit cannot exceed the selling price. Markup has no ceiling at all.
| Markup | Equivalent gross margin |
|---|---|
| 10% | 9.1% |
| 20% | 16.7% |
| 25% | 20.0% |
| 30% | 23.1% |
| 40% | 28.6% |
| 50% | 33.3% |
| 60% | 37.5% |
| 75% | 42.9% |
| 100% | 50.0% |
| 150% | 60.0% |
| 200% | 66.7% |
| 300% | 75.0% |
Keystone pricing — doubling the wholesale cost — is a 100% markup and a 50% margin. The two numbers describe the identical decision.
| Target margin | Selling price | Gross profit | Equivalent markup |
|---|---|---|---|
| 10% | $66.67 | $6.67 | 11.1% |
| 20% | $75.00 | $15.00 | 25.0% |
| 25% | $80.00 | $20.00 | 33.3% |
| 30% | $85.71 | $25.71 | 42.9% |
| 40% | $100.00 | $40.00 | 66.7% |
| 50% | $120.00 | $60.00 | 100.0% |
| 60% | $150.00 | $90.00 | 150.0% |
| 70% | $200.00 | $140.00 | 233.3% |
Each extra ten points of margin costs progressively more price. Going from 60% to 70% on a $60 cost means charging $50 more, not $10 more.
| Starting margin | 10% off | 20% off | 30% off |
|---|---|---|---|
| 20% | 50% | 100% | 150% |
| 30% | 33% | 67% | 100% |
| 40% | 25% | 50% | 75% |
| 50% | 20% | 40% | 60% |
| 60% | 17% | 33% | 50% |
At a 30% margin, a 20% discount wipes out two thirds of the gross profit and a 30% discount wipes out all of it — you would be selling at cost. Volume has to rise by a third at a 40% margin just to stand still after a 10% cut.
Common mistakes#
- Multiplying cost by (1 + margin) to set the priceA $60 cost times 1.40 is $84, which is a 28.6% margin, not 40%. On a business turning over $500,000 that eleven-point gap is roughly $57,000 of gross profit never earned, and it repeats on every single line until somebody checks the formula.
- Quoting gross margin as if it were the answerGross margin ignores rent, salaries, software, marketing, interest and tax. A 45% gross margin can end as a 3% net margin once overheads land, which is why a healthy gross figure never on its own proves that a business works.
- Discounting without checking what it costs in unitsAt a 40% margin, a 10% discount cuts gross profit per unit by 25%, so you must sell 1.33 times as many units to end up in the same place. At a 20% margin the same discount halves your profit and you would need to double volume.
- Leaving payment fees and returns out of unit costCard processing at 2.9% plus 30 cents, a 5% return rate and inbound freight can together take five or six points off a margin you believed was fine. Load them into cost before pricing, not into a variance report afterwards.
Frequently asked questions#
How do I convert markup into margin?
Margin = markup / (1 + markup). A 50% markup is a 33.3% margin, and a 100% markup is a 50% margin.
What is keystone pricing?
Doubling the wholesale cost to set the retail price — a 100% markup, which equals a 50% margin. It is the traditional default in apparel and gift retail.
Can a margin be more than 100%?
No. Margin is capped at 100% because profit can never exceed the selling price. Markup has no upper limit at all.
Should shipping be included in cost?
Include inbound shipping and payment fees in unit cost for an honest gross margin. If customers pay outbound shipping at cost, leave it out of both sides.
Key terms#
- Gross margin
- Revenue minus direct cost of goods, as a percentage of revenue. Measures the profitability of the product itself, before any overhead.
- Markup
- Profit as a percentage of cost. Always a larger number than the equivalent margin, which is why suppliers prefer to quote it.
- COGS (cost of goods sold)
- The direct costs of producing what you sold — materials, manufacturing labour, inbound freight. Excludes rent, salaries and marketing.
- Operating margin
- Profit after both COGS and operating expenses, as a percentage of revenue. The figure that shows whether the business, rather than the product, works.
- Net margin
- What is left as a percentage of revenue after every cost including interest and tax.
- Keystone pricing
- Doubling wholesale cost to set retail price — a 100% markup and a 50% margin. The traditional default in apparel and gift retail.
- Contribution margin
- Price minus all variable costs, showing what each additional unit contributes toward fixed costs. The right number for a break-even calculation.
Sources#
- Financial statements and margin definitions for small business — U.S. Small Business Administration
- Publication 334, Tax Guide for Small Business — cost of goods sold — Internal Revenue Service
- Quarterly financial report — industry profit margins by sector — U.S. Census Bureau
Figures last checked .
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