The short version
Margin = (price − cost) ÷ price × 100. Sell something for $100 that costs you $60 and your margin is ($100 − $60) ÷ $100 = 40%. That one line is the whole formula — but three things trip people up: the denominator is the price, not the cost; margin is not the same as markup; and discounts shrink margin far faster than their face value suggests.
The gross margin formula, step by step
Gross margin answers one question: of every dollar of revenue, how many cents do you keep before overhead? Work it with the $100 price / $60 cost example:
Step 1 — subtract. $100 − $60 = $40 of profit per unit. This is your gross profit in dollars.
Step 2 — divide by the price. $40 ÷ $100 = 0.40. This is the step everyone gets wrong: divide by the selling price, not the cost, because margin measures your share of what the customer actually paid.
Step 3 — multiply by 100. 0.40 × 100 = 40% margin. The formula in one line: margin % = (price − cost) ÷ price × 100. Run the same three steps on any product with the profit margin calculator.
Margin vs markup: the confusion that costs people money
Markup uses the cost as the denominator: ($100 − $60) ÷ $60 = 66.7%. Same $40 of profit, same transaction — but 40% margin and 66.7% markup are two different numbers, and swapping them is the most expensive arithmetic mistake in small business.
Markup is always the bigger number, so pricing from markup makes your margins look fatter than they are. A “50% markup” sounds like you keep half — but ($150 − $100) ÷ $150 is only a 33.3% margin. To convert: margin = markup ÷ (1 + markup) and markup = margin ÷ (1 − margin). Check it: 66.7% markup → 0.667 ÷ 1.667 = 40% margin. The profit margin calculator translates between the two so you never do this by hand.
How discounts eat margin (faster than you think)
Take the $100/$60 product at 40% margin and run a 20% sale. The sale price is $80, profit drops to $80 − $60 = $20, and the new margin is $20 ÷ $80 = 25%. The discount cost you 15 margin points and half your profit dollars — even though it was “only” 20% off.
Why so brutal? A discount attacks both halves of the fraction at once: it shrinks the profit on top and the sale price on the bottom. Stacked discounts compound instead of adding, too — 20% off, then 20% off again, is 36% off total ($100 → $80 → $64), not 40%.
Before approving any promotion, run it through the discount-vs-margin calculator: it shows the margin that survives the sale, the margin points the discount eats, the deepest discount that still makes money, and the discount that halves your margin.
What’s a good margin?
There is no universal answer — but there are useful ballparks for gross margin (before overhead):
Grocery and discount retail: roughly 20–30% gross — volume businesses survive on thin margins and huge throughput. Typical retail and e-commerce: roughly 30–50% gross, before marketing and shipping take their share. Manufacturing: roughly 25–40% gross, depending on labor content. Services and software: often 60%+ gross — no physical product eats the margin.
As a rule of thumb, a gross margin above 20% is healthy for most small businesses; 5–20% is workable but tight; under 5% leaves almost no room for a bad month. One important distinction: net margin — after rent, salaries, taxes, and everything else — is a different, much smaller number. Never compare someone else’s gross margin to your net margin.
Three mistakes that quietly wreck margin math
1. Dividing by cost instead of price. That computes markup, not margin — and your margins look healthier than they are. If your “margin” is above 100%, you’ve divided by cost.
2. Adding discounts instead of compounding them. A 20% coupon stacked on a 20% sale is not 40% off — it’s 36% off, because the second discount applies to the already-discounted price.
3. Pricing from average margin instead of per-unit margin. A blended 35% margin can hide products at 5% and products at 60%. Discount decisions should run on the per-unit margin of what’s actually on sale — the average will lie to you.
Frequently asked questions
How do I calculate margin on a calculator?
Subtract cost from price, divide by the price, and multiply by 100. Example: (100 − 60) ÷ 100 × 100 = 40%. The most common mistake is dividing by the cost instead — that gives you markup, not margin.
What is the margin if I buy for $60 and sell for $100?
40%. Profit is $100 − $60 = $40, and $40 ÷ $100 = 0.40, or 40%. (The markup on the same deal is 66.7% — same profit, different denominator.)
How do I convert markup to margin?
Divide markup by one plus markup: margin = markup ÷ (1 + markup). A 66.7% markup converts to 0.667 ÷ 1.667 = 40% margin. Going the other way: markup = margin ÷ (1 − margin).
What discount cuts my profit margin in half?
It depends on your starting margin — the thinner it is, the sooner. On a $100 price with $60 cost (40% margin), a 25% discount halves it to 20%. The discount-vs-margin calculator solves this for any price and cost.
Is a 50% margin good?
Yes — 50% gross margin is excellent in most industries, well above the roughly 20% comfort line. Just compare gross to gross: a 50% gross margin says nothing about what survives after overhead.