How to Calculate Profit Margin

Updated 2026-08-31 · ProfitKit

Profit margin = (Net profit ÷ Revenue) × 100. Net profit is your selling price minus every cost that sale caused: the product, the postage, the platform's cut and the payment processor's cut. If you divide by cost instead of revenue you have calculated markup, not margin, and you will overstate how healthy the sale is.

The two margins that matter

Gross margin subtracts only the direct cost of the goods. It answers "is this product fundamentally viable?"

Net margin subtracts everything — fees, shipping, packaging, returns, the software you pay for. It answers "am I actually making money?" Only one of these pays your rent.

Margin versus markup

These produce different numbers from identical money, and the confusion costs real income:

• Buy at $10, sell at $20 → margin 50%, markup 100%
• Buy at $10, sell at $15 → margin 33%, markup 50%

Suppliers and wholesalers quote markup because it sounds larger. When someone says "we work on 40%", ask which one they mean before you price against it.

Three mistakes that inflate your margin

1. Leaving out the payment processor. A percentage plus a fixed amount per transaction. On low-priced items the fixed part alone can be 3–5% of the whole sale.
2. Treating charged shipping as free. If the buyer pays $6 and postage costs you $7.40, you are subsidising every order.
3. Ignoring returns. A 10% return rate removes roughly 10% of your unit profit, plus the postage you do not get back.

What to do with the number

A margin figure on its own is not actionable — the split of where the money went is. Run your real numbers through the calculator and look at which segment is largest. That segment, not "more sales", is where your next hour of work belongs.

Do the calculation