Profit Formula
The exact costs included depend on whether you are calculating gross profit, operating profit or another profitability measure. State the definition before comparing two results.
Profit Margin Formula
If revenue is $10,000 and the selected costs are $7,000, profit is $3,000 and the resulting margin is 30%.
Gross Margin vs Net Margin
Gross margin generally focuses on revenue after direct cost of goods or services. Net margin uses a broader profit measure after additional expenses. The labels and accounting definitions can vary, so do not compare percentages without checking what is included.
Worked Product Example
A product costs $60 and sells for $100. Profit is $40, so the margin is 40%. If the business also incurs $10 of selling or fulfillment costs attributable to the transaction, the relevant profit measure becomes $30 and the margin becomes 30%.
Margin vs Markup
Margin divides profit by revenue. Markup divides profit by cost. For a $60 cost and $100 selling price, margin is 40% while markup is 66.67%.
How to Improve Margin
A business can improve a modeled margin by increasing price, reducing relevant costs, changing the product mix or reducing discounts. The effect on demand and total profit must also be considered; a higher margin percentage does not automatically mean higher total profit.
Common Mistakes
- Using cost instead of revenue as the denominator.
- Mixing gross and net profit definitions.
- Ignoring discounts, returns or transaction costs.
- Comparing businesses with different accounting definitions as if their margins were identical.
Use the Tervilo Profit Margin Calculator
Use the Profit Margin Calculator to model revenue, cost, profit, margin and markup.
Choose the Profit Measure Before Calculating
Profit margin is meaningful only when the profit definition is clear. Gross margin, operating margin and net margin use different cost bases, so two percentages should not be compared until the underlying figures are defined consistently.
Margin From Selling Price and Cost
Margin = Profit ÷ Selling Price × 100
For a product sold for 100 with a relevant cost of 60, the profit is 40 and the margin is 40%. The markup on the same transaction is 66.67% because markup uses cost as the denominator.
Discounts and Returns
Revenue may need to account for discounts, refunds or returns before a margin is compared across periods. State whether the figures represent list price, invoiced revenue or net realized revenue.
Contribution Margin
Contribution margin focuses on revenue remaining after variable costs and is useful for break-even and pricing analysis. It should not automatically be described as the same measure as gross or net profit margin.
How to Compare Margins
- Use the same revenue definition.
- Use the same cost definition.
- Check whether discounts and returns are included.
- Compare the same period.
- Review the underlying amounts, not only the percentage.
Use the Tervilo Profit Margin Calculator
Use the Tervilo Profit Margin Calculator to calculate a margin from the revenue and cost assumptions you provide.
Choose the Profit Measure Before Calculating
Profit margin is meaningful only when the profit definition is clear. Gross margin, operating margin and net margin use different cost bases, so two percentages should not be compared until the underlying figures are defined consistently.
Margin From Selling Price and Cost
Margin = Profit ÷ Selling Price × 100
For a product sold for 100 with a relevant cost of 60, the profit is 40 and the margin is 40%. The markup on the same transaction is 66.67% because markup uses cost as the denominator.
Discounts and Returns
Revenue may need to account for discounts, refunds or returns before a margin is compared across periods. State whether the figures represent list price, invoiced revenue or net realized revenue.
Contribution Margin
Contribution margin focuses on revenue remaining after variable costs and is useful for break-even and pricing analysis. It should not automatically be described as the same measure as gross or net profit margin.
How to Compare Margins
- Use the same revenue definition.
- Use the same cost definition.
- Check whether discounts and returns are included.
- Compare the same period.
- Review the underlying amounts, not only the percentage.
Use the Tervilo Profit Margin Calculator
Use the Tervilo Profit Margin Calculator to calculate a margin from the revenue and cost assumptions you provide.