The core profit margin formula is simple: Profit Margin = (Profit ÷ Revenue) × 100. Profit margin expresses profit as a percentage of revenue, so it tells you how many cents of profit you keep from every dollar of sales.

Which profit figure you plug in determines which margin you get. Use gross profit (revenue minus direct costs) for gross profit margin, or net profit (revenue minus all included costs and operating expenses) for net profit margin. Both are percentages, but they answer different questions about your business.

Gross Profit = Revenue − COGS

Gross Profit Margin = (Gross Profit ÷ Revenue) × 100

Worked example: a business earns $50,000 in revenue and has $20,000 in cost of goods sold. Gross profit is $50,000 − $20,000 = $30,000. Gross profit margin is ($30,000 ÷ $50,000) × 100 = 60%. This means 60% of revenue remains after the direct cost of what was sold.

Net Profit = Revenue − COGS − Operating Expenses

Net Profit Margin = (Net Profit ÷ Revenue) × 100

Worked example: using the same $50,000 revenue and $20,000 COGS, the business also has $15,000 in operating expenses. Net profit is $50,000 − $20,000 − $15,000 = $15,000. Net profit margin is ($15,000 ÷ $50,000) × 100 = 30%. This shows what remains as profit after all included costs.

Profit margin and markup are often confused, but they use different bases. Profit margin measures profit as a percentage of the selling price. Markup measures profit as a percentage of cost.

Numerical example: an item costs $60 and sells for $100. The profit is $40. The profit margin is ($40 ÷ $100) × 100 = 40%. The markup is ($40 ÷ $60) × 100 = 66.67%. Same dollar profit, two different percentages — because margin divides by the larger selling price and markup divides by the smaller cost.

This matters for pricing. If you apply a "40% markup" to a $60 cost, you get an $84 selling price. If you want a "40% profit margin" on a $60 cost, you need a $100 selling price. Mixing the two up is one of the most common pricing mistakes small businesses make.

Using the example built into the calculator above — revenue of $100,000, COGS of $40,000, and operating expenses of $35,000:

• Gross Profit: $60,000 (Revenue − COGS)
• Gross Margin: 60% ($60,000 ÷ $100,000)
• Net Profit: $25,000 ($100,000 − $40,000 − $35,000)
• Net Margin: 25% ($25,000 ÷ $100,000)
• Markup on COGS: 150% ($60,000 ÷ $40,000)

In plain terms: of the $100,000 earned, $60,000 remains after direct costs (a 60% gross margin). After $35,000 of operating expenses, $25,000 remains as net profit (a 25% net margin). The $60,000 of gross profit is 150% of the $40,000 cost — that is the markup.

1. Enter your total revenue for the period.
2. Enter your cost of goods sold (direct costs of producing or delivering what you sold).
3. Enter your operating expenses (rent, payroll, software, utilities, marketing, etc.).
4. Review your gross profit and gross margin to see what remains after direct costs.
5. Review your net profit and net margin to see what remains after operating expenses.
6. Review your markup to see profit as a percentage of cost.

Use the Target Profit Margin Calculator above to work backwards from a desired margin to the selling price you would need to charge.

Profit-margin analysis helps a small business evaluate several areas at once. It shows whether pricing is high enough to cover costs, whether direct costs are eating too much of revenue, and whether operating expenses are sustainable relative to sales.

Comparing margins across products and services can reveal which ones are actually profitable and which ones look busy but contribute little. Over time, tracking margins is a simple way to monitor business performance and overall profitability without needing complex accounting reports.

There is no single universally "good" profit margin. Margins vary widely by industry, business model, company size, expense structure, accounting practices, and other factors. A healthy margin for a consulting firm and a healthy margin for a grocery store look very different. Use margins to compare against your own past performance and your industry's norms rather than against an arbitrary target.

For more on organizing the technology side of your business, see our Software Budget Calculator or browse Business Tools Lab guides on software selection and operations.