Profit Calculator

One transaction, two percentages

Something cost you 300,000. You sold it for 500,000. You made 200,000.

Now, what percentage was that?

There are two correct answers and they are a long way apart.

Same money, same sale, same profit. Forty percent or sixty six and two thirds, depending entirely on what you divide by.

This is the single most common source of confusion in small business pricing, and it is expensive. So this calculator gives you both. Enter the sales figure and the margin you want, and it returns the profit, the cost that leaves you, and the markup that same arrangement represents.

Five hundred thousand at forty percent

Sales of 500,000 at a gross margin of 40 percent.

Forty percent of 500,000 is 200,000 of profit. Subtract that from the sale and the goods must have cost 300,000. Then the markup is the profit measured against that cost, which is 66.67 percent.

Read the third row as the instruction you would give someone doing the pricing. To achieve a 40 percent margin, they need to take each item's cost and add two thirds of it. Not 40 percent of it.

That is the practical value of having both figures side by side. Margin is what you report. Markup is what you do. One describes the outcome, the other tells you what to type into the price field.

Converting between the two

Two formulas, and they are worth writing down somewhere permanent.

Markup = Margin / (1 - Margin)

Margin = Markup / (1 + Markup)

Or use the table.

Three things fall out of that table that are worth noticing.

Markup is always the larger number. Always, because cost is always smaller than selling price, and dividing by a smaller number gives a bigger answer.

They diverge faster as they climb. At 20 percent the two are five points apart. At 50 percent they are fifty points apart. At 75 percent margin the markup is 300 percent. Which is why the confusion is relatively harmless in low margin businesses and severe in high margin ones.

A 50 percent margin means doubling the cost. That is the one worth memorising, because it is the anchor point people can check everything else against. If you have to double it, the margin is 50 percent and the markup is 100.

The mistake that costs the most

Here is how it happens in practice, and it is nearly always the same way round.

Somebody decides the business needs a 50 percent margin. They tell whoever prices the goods to apply a 50 percent markup, because in ordinary speech those sound like the same instruction.

Goods costing 300,000 are marked up by half, giving a price of 450,000. The profit is 150,000.

And the margin achieved is 150,000 over 450,000, which is 33.33 percent.

Not 50. A shortfall of nearly seventeen percentage points, and in money, on that volume of sales, 75,000 less profit than intended.

What makes this expensive rather than merely annoying is that it does not announce itself. Prices look reasonable, goods sell, the business runs. The gap only shows up when somebody works out at the end of the year why the margin is nowhere near the target, and by then a full year has been priced wrongly.

The error also compounds through a supply chain. A distributor working on markup and a retailer working on margin will produce a final price neither of them expected, and each will be convinced the other has changed their terms.

So the fix is one sentence long, and it belongs in any conversation about pricing: say which one you mean. The number on its own is not enough information.

Worth noting that the language cuts one way in official use. The Federal Trade Commission's own pricing guides describe a retailer whose pens cost five dollars and whose usual markup is 50 percent over cost, giving a regular price of seven dollars fifty. That is markup, stated explicitly as over cost, and it produces a 33.33 percent margin. Even the regulator spells out which basis it means.

Which profit this is measuring

The output says gross profit, and the word gross is doing real work.

Gross profit is sales minus the direct cost of what you sold. Materials, the goods themselves, the labour that went directly into them. It stops there.

It does not subtract rent, salaries for people not making the product, marketing, software, interest or tax. Those come out later and they are the difference between a healthy gross margin and a business that still loses money.

Which is why a strong figure here is necessary rather than sufficient. Plenty of businesses run at 60 percent gross margin and lose money, because the overhead underneath is larger than the gross profit above it.

The way to use this number properly is as the top of a stack:

Our profit to sales ratio calculator works at the bottom of that stack, and the gap between the two figures is everything your business spends that is not the product itself.

One practical use of the cost output that is easy to miss. It tells you the maximum you can pay a supplier and still hit your target margin at your intended price. Work backwards from the price you can charge rather than forwards from the price you are quoted, and you have a negotiating position rather than a hope.

Questions people ask

What is the difference between margin and markup?

Both measure the same profit. Margin divides it by the selling price, markup divides it by the cost. A 40 percent margin is a 66.67 percent markup on the identical transaction.

Which one should I price on?

Price using markup, since you start from a cost. Report and compare using margin, since that is what appears on financial statements and what everyone else quotes.

Why can I not enter a margin of 100 percent?

Because a 100 percent margin means the goods cost nothing, and the markup would be infinite. The field stops at 99.99 for that reason.

Is this gross or net profit?

Gross. It subtracts only the direct cost of the goods. Rent, salaries, marketing, interest and tax all come out after this figure.

If I double the cost, what margin do I get?

Fifty percent. Doubling is a 100 percent markup, which is a 50 percent margin. That is the easiest anchor point to remember.

Can I work out what I can afford to pay a supplier?

Yes, and the cost row does exactly that. Enter your intended selling price and your target margin, and the cost figure is your ceiling.

Does this work for services?

Yes, with direct cost meaning the labour and materials consumed delivering the service. Service businesses often have high gross margins and heavy overheads, so the caution about gross not being net matters more there.

References

A note on the sources. Margin and markup are conventions rather than regulated quantities, but the distinction turns up in law more often than people expect: the Federal Trade Commission's pricing guides work through an example expressly stated as a markup over cost, which is exactly the basis this calculator reports, and which produces a very different percentage from the margin on the same sale. Where gross profit sits relative to operating and net profit is defined by the structure of the income statement, explained in the Securities and Exchange Commission's guide for investors.

1. Federal Trade Commission, 16 CFR § 233.1, Former price comparisons, Guides Against Deceptive Pricing, including the worked example of a retailer whose usual markup is 50 percent over cost. https://www.ecfr.gov/current/title-16/chapter-I/subchapter-B/part-233/section-233.1
2. U.S. Securities and Exchange Commission, Beginners' Guide to Financial Statements, on the income statement and the relationship between revenue, costs and the successive levels of profit. https://www.sec.gov/about/reports-publications/investorpubsbegfinstmtguide
3. Brealey, R.A., Myers, S.C., and Allen, F., Principles of Corporate Finance, McGraw-Hill Education, chapters on margins and financial statement analysis.