Profit Margin Calculator

A measure of what is considered a good profit margin depends on the industry that your company is in. This is because the costs and materials needed for your products and services will differ from industry to industry. The location of your business would also play a part in determining profit margin as rental and payroll.

When it comes to measuring profitability, a gross profit margin is fine for determining the profitability of a particular item. Still, net profit margins are a better measure of overall profitability. Generally, a 10% net profit margin is considered average, a 20% margin is considered high (or “good”), and a 5% margin is low. Hitting a 5-10% net profit margin can be considered a good profit margin.

The formula to calculate gross profit margin is: Gross Profit Margin = Gross Profit / Revenue x 100

Let’s look at an example to see how this works. FYR Company is an ecommerce shop selling customised gifts. In 2023, they gained a revenue of $700,000 from selling customised mugs. The cost of goods sold (the direct cost of producing the shirts) is $200,000. All other operating expenses are $400k. Now let’s calculate the gross and net profit margins for FYR Company in 2020.

Income Statement:

Revenue: $700,000

Cost of Goods Sold: ($200,000)

Gross Profit: $500,000

Other Expenses: ($400,000)

Net Income: $100,000

Based on the above income statement figures, the answers are: FYR’s gross margin equals $500,000 of gross profit divided by $700,000 of revenue, which equals 71.4%.

Net margin is $100k of net income divided by $700k of revenue, which equals 14.3%.

The gross profit margin is used to look at how much profit a single product brings to your business, while the net profit margin is used to look at the overall profitability of your business.

Let’s take a look at how to measure gross profit margin. For example, if you sell a product for $50 and it costs you $35 to make, your gross profit margin is 30% ($15 divided by $50). While this metric is good to know, it’s not the one to use when evaluating your business’s profitability.

Now let’s take a look at how to calculate the net profit margin. Net profit margin looks at total sales, subtracts business expenses, and divides that figure by total revenue. For example, if your new business brought in $300,000 last year and had expenses of $250,000, your net profit margin is 16%.

Gross profit margin and markup are considered separate accounting terms that use the same inputs- both use revenue and costs as part of their calculation. Both these metrics look at the same transaction yet shows different information.

So what is the difference between these two measurements? Profit margin refers to sales minus the cost of goods sold, while markup refers to the amount by which the cost of goods is increased to get the final selling price or price that you set to your customers.

These two terms will help you understand how to set prices appropriately. You want to set the correct pricing so that your business will not lose out on sales and, thus, profits.