Profit Margin Formula
Calculate profit margin with (Revenue - Cost) / Revenue × 100.
Understand how much profit your business keeps from each dollar of sales.
The Formula
Profit margin shows what percentage of revenue is actual profit after costs are subtracted. A higher margin means a more profitable business.
Variables
| Symbol | Meaning |
|---|---|
| Profit Margin | Percentage of revenue that is profit |
| Revenue | Total income from sales |
| Cost | Total cost of goods or services sold |
Example 1
A bakery sells $40,000 worth of goods in a month. The total cost was $28,000.
Revenue = $40,000, Cost = $28,000
Profit = $40,000 - $28,000 = $12,000
Profit Margin = (12000 / 40000) × 100
Profit Margin = 30% — The bakery keeps 30 cents of every dollar earned.
Example 2
A freelancer charges $5,000 for a project. Their expenses total $1,500.
Revenue = $5,000, Cost = $1,500
Profit = $5,000 - $1,500 = $3,500
Profit Margin = (3500 / 5000) × 100
Profit Margin = 70% — The freelancer keeps 70% of the project fee as profit.
When to Use It
Use the profit margin formula when:
- Evaluating how efficiently a business converts revenue into profit
- Comparing profitability across different products or services
- Setting prices to ensure adequate profit margins
- Tracking business performance over time
Key Notes
- Three margin types tell different stories: gross margin = (revenue − COGS) / revenue; operating margin also subtracts operating expenses; net margin subtracts everything including taxes — this formula gives net margin only when "cost" includes all expenses
- Industry benchmarks vary enormously: software companies target 20–30%, grocery retailers operate on 1–3% — comparing margin percentages only makes sense within the same industry; a 5% margin can be excellent in retail and catastrophic in software
- Markup (on cost) and margin (on revenue) are different: a 100% markup gives a 50% margin; a 50% markup gives a 33% margin; confusing them leads to serious underpricing — always specify which one you are using
- Improving margin is not always the right strategy — cutting R&D and marketing raises short-term net margin but destroys long-term revenue; sustainable profitability requires balancing margin with revenue growth, customer retention, and reinvestment