Profit Margin Calculator: Calculate Your Current and Desired Margin

If you know the cost of stocking the goods you sell and your selling price, stay on the Profit Margin tab and enter these figures. The calculator will return your profit margin as a percentage and as a dollar amount, and also your markup as a percentage.

If you know your desired profit margin but need help setting the price, choose the Desired Profit Margin tab, enter the cost of stocking the goods and the desired profit margin as a dollar sum or as a percentage, and choose Profit (if you entered a dollar sum) or Margin (for percentages) from the dropdown menu. The calculator will return your ideal selling price and the percentage markup.

➔ TIP: Select your industry from the dropdown menu to compare your results with industry norms.

How to calculate your current profit margin (gross or net).

You can calculate your current profitability as a gross profit margin or net profit margin. Each has different uses within a business.

Gross profit margin is the money you make when subtracting the cost of producing or sourcing the goods or services you sell from your revenue.

This figure helps you identify and compare the potential of your product lines, regulate pricing and stock flow and assess the efficiency of your supply chain.

➔ TIP: To calculate gross profit margin, use this formula:

1. Total revenue – Cost of goods sold = Gross profit margin in dollars
2. (Gross profit margin in dollars ÷ Total revenue) x 100 = Gross profit margin as a percentage

Net profit margin is the money that’s left after subtracting not only the cost of the product (COGS) but also the remainder of your operating expenses, such as rent, administration, taxes, etc.

This gives a fuller picture of your business’s profitability compared to gross profit margin alone. You can use it to assess the company’s financial health both internally and against industry benchmarks.

➔ TIP: To calculate net profit margin, use this formula:

1. Total revenue – All costs = Net profit margin in dollars
2. (Net profit margin in dollars ÷ Total revenue) x 100 = Net profit margin as a percentage

How to calculate your desired profit margin.

While profit margin represents what you have left after subtracting your production costs from your selling price, markup is the amount you add to your production cost to deduce your selling price.

As such, profit margin is calculated as a percentage of the selling price, and markup is calculated as a percentage of the cost of producing or sourcing the product.

If you know your desired profit margin, you can use this to calculate your markup. However, more often, markup is used as an initial means of setting prices by comparing the markup that competitors in the same industry or region apply to the same or similar products. You should also take customer perception into account: might it appear that you are charging an unreasonable amount on top of your costs?

Once you have identified a feasible markup (the percentage you charge on top of your costs), you can use this to calculate your profit margin (the money you make from sales after deducting your costs).

What is profit margin?

Profit margin refers to the amount of money your business makes after subtracting its costs. It can be expressed as a dollar figure from which you can calculate your profit margin as a percentage. For example, if it costs you $7.50 to produce a $10 product, your profit margin is $2.50 or 25% ($2.50 as a percentage of $10).

Your profit margin illustrates the ‘profitability’ of your business and is an essential metric when you assess the viability of new products, deals or strategies.

5 ways to improve your profit margin.

Profit margins — and what’s considered a good profit margin — can vary throughout the year and always vary widely between industries. For example, firms in the auto parts trade may have an average net profit margin of around 2.27%, in the computers and peripherals trade it’s around 16.78%, and software (entertainment) firms average 27.43%, according to one study.

Still, there is always room for improvement, particularly if meeting your targets has become a challenge. Here are five ways that you can improve the profit margin for your small business:

1. Optimize your product line. Identify your biggest sellers and those with the highest profit margins, and focus your marketing and upselling on these. Cut low-performing products.
2. Look into introducing new lines. Identify potential new products that may perform well or draw new customers to your business.
3. Try to cut production or supply costs. Reduce your bottom line by finding ways to optimize production or by renegotiating wholesale prices with suppliers.
4. Streamline your working processes. Reduce waste by improving inventory management, optimizing working hours and consolidating premises to improve your net profit margin.
5. Consider increasing your prices. Analyze your pricing to see where you can adjust the markup without alienating customers. Think about different pricing strategies, such as  bundle deals and subscriptions.

With a firm grip of profit margins and markup, your business is set to strategize financially for the months, quarters and years ahead.