What Is Profit Margin?
Definition
Profit Margin: The profit as a percentage of the selling price: profit = price − cost, margin = profit / price × 100. A product that costs 30 and sells for 45 has a 33.33% margin. It cannot reach 100%.
Profit margin is the profit as a percentage of the selling price: subtract the cost from the price, divide the profit by the price and multiply by 100. Sellers use it to set prices and to compare products. Because the profit cannot be larger than the price, a margin cannot reach 100%. Selling below cost gives a negative margin.
Where it appears in the formulas
margin = (price − cost) / price × 100. A product that costs 30 and sells for 45 makes a profit of 15, so its margin is 15 / 45 × 100 = 33.33%. To find the price for a target margin, use price = cost / (1 − margin / 100). The profit margin calculator works in all four directions.
The difference from markup
Markup divides the same profit by the cost instead of the price, so for one product it is always larger. The product above has a 50% markup. Adding 40% to the cost does not give a 40% margin; it gives 28.57%. Both rates use amounts before VAT.