Profit Margin Calculator

A profit margin calculator shows how much of every sale you actually keep. Enter what an item costs you and what you sell it for, and our free tool works out the gross profit, the margin and the markup instantly. You can also work backwards: set a target margin or markup to get the price you need to charge, or start from a fixed retail price to find the most you can pay for stock. If your prices include VAT, tick one box and the calculator strips out the 20% standard rate (or 5% reduced rate) before it works out your margin, so the figures reflect the money that is really yours. A conversion table explains the difference between margin and markup, which is one of the most common pricing mistakes in small businesses.

How to use the Profit margin

1. 1 Choose what you knowPick cost and price, cost and target margin, cost and markup, or price and target margin. The boxes change to match.
2. 2 Enter your figures in poundsType the cost per item and the selling price or percentage. You can include a pound sign or commas; the calculator ignores them.
3. 3 Tell it about VATIf the selling price you enter includes VAT, tick "Prices include VAT" and pick the rate. The margin is then worked out on the price excluding VAT.
4. 4 Read the headline resultThe big number is the figure you asked for: your margin, the price to charge or the most you can pay. The table underneath shows every other figure.
5. 5 Compare prices at other marginsUse the price ladder to see what you would charge at margins from 10% to 60%, then copy the results into your price list or quote.

Margin and markup are not the same thing

Both figures describe the same profit, but they divide it by different numbers. Margin is profit as a percentage of the selling price. Markup is profit as a percentage of the cost. If you buy a product for £60 and sell it for £100, your profit is £40. Divide £40 by the £100 price and the margin is 40%. Divide £40 by the £60 cost and the markup is 66.7%.

The trouble starts when someone wants a 40% margin but adds 40% to the cost instead. A £60 item marked up by 40% sells for £84, which is a margin of only 28.6%. Across a whole range of products that gap can wipe out most of the profit a business thought it was making. The conversion table in the tool shows the matching markup for common margins, so you can switch between the two without doing the algebra yourself.

Markup is always the larger number of the two, apart from when the profit is zero. A margin can never reach 100%, because that would mean the item cost you nothing, but a markup can be 100%, 200% or more. Doubling the cost, sometimes called keystone pricing in retail, is a 100% markup and a 50% margin.

The formulas behind the calculator

Every result comes from a handful of simple formulas. They are worth knowing, because once you understand them you can check any supplier quote, price list or spreadsheet in seconds.

• Gross profit = selling price - cost.
• Margin = gross profit / selling price x 100.
• Markup = gross profit / cost x 100.
• Price from a target margin = cost / (1 - margin). For a 40% margin on a £60 cost: 60 / 0.6 = £100.
• Price from a markup = cost x (1 + markup). For a 50% markup on £60: 60 x 1.5 = £90.
• Maximum cost for a fixed price = price x (1 - margin). To keep 40% of a £100 price, the item can cost at most £60.
• Converting: markup = margin / (1 - margin), and margin = markup / (1 + markup).

How VAT affects your margin

If your business is registered for VAT, the VAT you charge customers is not income. You collect it on behalf of HMRC and pay it over in your VAT return, after deducting the VAT you paid on your own purchases. That is why your margin must be worked out on the price excluding VAT. A product sold for £120 including 20% VAT brings in £100 of revenue for you and £20 for HMRC.

To remove VAT from a gross price, divide by 1.2 for the standard rate or 1.05 for the reduced rate. Do not take 20% off the gross price: 20% of £120 is £24, which gives the wrong answer of £96. The calculator does this correctly when you tick the VAT box, and it shows the VAT element separately so you can see where the money goes.

For the cost figure, enter what the item costs you net of any VAT you can reclaim. If you are not VAT registered, you cannot reclaim VAT on purchases, so the VAT you pay is a real cost and should be included in the cost figure, and you leave the VAT box unticked because you do not charge VAT on your sales. Check the current VAT rate and the registration threshold on GOV.UK, as both can change in a Budget.

Gross margin, net margin and what to include in cost

This calculator works out gross margin for a single product or service: the selling price minus the direct cost of that item. Direct costs are the ones that rise and fall with each sale, such as stock bought for resale, raw materials, packaging, delivery to the customer and payment processing fees. Including card and marketplace fees often changes the picture, because a 3% card fee and a 15% marketplace commission come straight off the margin.

Net margin is a different measure. It takes the whole business into account, including rent, wages, insurance, software, advertising and other overheads, and is usually worked out from your profit and loss account for a month or a year. A product can have a healthy gross margin while the business as a whole makes a loss, if the overheads are larger than the total gross profit. To see how many sales you need to cover those overheads, use our Break-Even Calculator alongside this tool.

For services, the cost is usually your time and any materials. Put a value on your hours, even if you are a sole trader, so that the margin you see shows whether a job is worth taking. A trades business might cost labour at a fixed hourly rate plus materials at what they cost from the merchant, then add the margin on top.

Choosing a sensible margin

There is no single right margin. It depends on your sector, how much competition you face, how much stock you hold, how quickly it sells and how much service you wrap around the product. A business selling commodity items with low overheads can survive on a thin margin with high volume. A specialist maker or a consultant with fewer sales usually needs a much higher one.

A better starting point than a rule of thumb is your own numbers. Work out your monthly overheads, estimate how many items or jobs you can realistically sell, and check that the gross profit from those sales covers the overheads with something left over. Then compare your prices with competitors to make sure customers will pay them. If they will not, look at reducing the cost before cutting the margin.

Remember that discounts hit margin much harder than they appear to. On a product with a 30% margin, a 10% discount takes away a third of the profit on each sale, and you would need to sell 50% more units to earn the same gross profit as before.

Using the price ladder and copying results

Once you enter a cost, the price ladder shows what you would charge at margins of 10%, 20%, 25%, 30%, 40%, 50% and 60%, with the inclusive price alongside when VAT is switched on. It is a quick way to set prices for a new product range or to see how far you can move on a quote before the job stops being worthwhile.

The copy button puts a plain-text summary of the current results on your clipboard, ready to paste into a spreadsheet, an email to your accountant or a note on a quote. Everything is worked out in your browser, so your costs and prices are never uploaded or stored. Results are rounded to the nearest penny for display, so totals across many items can differ by a few pence from a spreadsheet that keeps every decimal place.

Examples you can copy

Cost             £60.00
Selling price    £100.00
Gross profit     £40.00
Margin           40.0%   (40 / 100)
Markup           66.7%   (40 / 60)

Cost                     £13.00
Price ex. VAT            13 / (1 - 0.35) = £20.00
VAT at 20%               £4.00
Price inc. VAT           £24.00
Gross profit             £7.00 (35% margin, 53.8% markup)

Common mistakes to avoid

Frequently asked questions