On This Page
- One revenue, three margins
- Walking down the income statement
- Pricing backward from a margin
- Margin is not markup
- Industry benchmarks
- Four businesses, checked
- How the calculator is verified
- FAQ
One Revenue, Three Margins
A profit margin is the share of revenue you keep after certain costs. A 30% margin means $0.30 of every $1 of sales. Which costs you subtract decides which margin you get, and all three divide by the same revenue, which is what makes them comparable:
| Margin | Subtract from revenue | What it tells you |
|---|---|---|
| Gross | Cost of goods sold | Whether the product itself makes money |
| Operating (EBIT) | COGS + operating expenses | How efficiently the business runs, before financing |
| Net | Everything, including interest and tax | What the business actually keeps |
Margin on a single sale, measured against its cost or its price, is covered by the Profit Percentage Calculator. How well invested capital pays back over time is a job for the ROI Calculator.
Walking Down the Income Statement
Using $100,000 of revenue:
- − $60,000 COGS = $40,000 gross profit, a 40% gross margin
- − $15,000 operating expenses = $25,000, a 25% operating margin
- − $5,000 interest and tax = $20,000, a 20% net margin
The 20-point gap between gross and net shows how much overhead and financing the business carries. COGS should include every cost of each sale: materials, direct labor, per-unit shipping, and payment and platform fees such as Stripe, Shopify or Amazon referral fees. Leaving those out, or measuring against revenue before refunds and discounts, makes the margin look better than it is. Monthly net margins also swing with the seasons, so judge a full year.
Pricing Backward from a Margin
A $60 cost at a 40% target needs $60 ÷ 0.60 = $100. A $55 product at 45% needs $100 too. Enter cost and a target in the calculator for the price and the most you can afford to pay. The table shows common targets:
| Target gross margin | Multiply cost by | Most COGS per $100 of sales | Same as a markup of |
|---|---|---|---|
| 10% | 1.111 | $90 | 11.1% |
| 20% | 1.25 | $80 | 25.0% |
| 25% | 1.333 | $75 | 33.3% |
| 30% | 1.429 | $70 | 42.9% |
| 40% | 1.667 | $60 | 66.7% |
| 50% | 2.00 | $50 | 100% |
| 60% | 2.50 | $40 | 150% |
| 70% | 3.333 | $30 | 233.3% |
Margin Is Not Markup
Margin divides profit by the selling price and markup divides it by cost, so the same $40 profit on a $60 item is a 40% margin and a 66.7% markup. Convert with markup = margin ÷ (1 − margin) and margin = markup ÷ (1 + markup). Markup vs margin: why a 50% markup isn't a 50% profit margin covers what the mix-up costs, and the Markup Calculator prices up from cost.
Industry Benchmarks
Compare only against your own sector. Typical ranges:
- Retail: gross margins of 40–60% for clothing and jewelry, 40–50% for furniture, 25–35% for grocery and just 5–10% for electronics. Net margins are usually 2–6%, and above 10% is strong.
- Restaurants: food cost of 28–35% leaves a 65–72% gross margin, and after labor (30–35%) and rent, net margins run 3–9%. To see how many covers you need to pay the fixed costs, use the Break Even Point Calculator.
- HVAC and trades: 40–60% gross on parts and service, 5–12% net. Service work carries more margin than installs.
- Ecommerce: physical goods 20–50% gross and digital products 70–90%. After ads (often 15–30% of revenue), shipping and fees, net margins run 10–20%. Amazon fees often take 25–35% of the price, so put them in COGS and ad spend in operating expenses.
Four Businesses, Checked
- A product: it sells for $80 and costs $48 to make and ship, so gross profit is $32, a 40% gross margin.
- A small business month: $50,000 of sales, less $28,000 COGS, $12,000 of operating costs and $3,000 of other costs, gives 44% gross, 20% operating and 14% net.
- A consultant: a $8,000 invoice with $2,400 of direct costs and $1,600 of allocated overhead gives 70% gross and 50% net.
- An Amazon listing: $35 price with $21 of product, shipping and fees gives a 40% gross margin, and $5 of ads per unit leaves 25.7% net.
In Excel, with revenue in A1, COGS in A2 and operating expenses in A3: gross margin is =(A1-A2)/A1, operating margin is =(A1-A2-A3)/A1 and the target price is =A2/(1-target), formatted as percentages where needed.
How the Calculator Is Verified
Gross, operating, and net margin peel back the income statement one layer at a time from the same revenue, COGS, operating expense, and other-expense fields you fill in once. Gross margin divides (revenue minus COGS) by revenue; operating margin divides (gross profit minus operating expenses) by revenue; net margin divides (operating profit minus other expenses) by revenue. Because all three read from the same four inputs, changing the operating expense field alone will shift the operating and net margin figures on screen but leave the gross margin figure untouched.
Frequently Asked Questions
How do you calculate profit margin in Excel?
With revenue in A1 and COGS in A2: gross margin = =(A1-A2)/A1, formatted as a percentage. For net margin, subtract all cost cells from A1 in the numerator. To calculate a target selling price from a desired margin in A3: =A2/(1-A3).
What is a good profit margin?
It depends entirely on the industry. Retail: 5–10% net is acceptable, 15%+ is strong. Restaurants: 3–9% net. SaaS software: 20–40% net. Ecommerce physical goods: 10–20% net. Never compare margins across industries, a 5% net margin is tight for software but solid for grocery. Compare gross margins within your sector to benchmark production efficiency.
References
- Profit Margin, Investopedia: explanation of all three margin types with industry context and real company examples.
- Gross Profit, Investopedia: definition of gross profit and how COGS is determined across different business types.
- Operating Profit Margin, Investopedia: how EBIT margin is used to compare core business efficiency across companies with different financing structures.