How to Calculate Gross Profit Margin for a Small Business
Margin shows what share of your selling price is left after paying for the product. It is the quickest health check for any small shop or online store.
Step 1: find gross profit
Gross profit = Selling price − Cost of the item. If you buy for 60 and sell for 100, gross profit is 40.
Step 2: find the margin
Margin % = Gross profit ÷ Selling price × 100
So 40 ÷ 100 = 40% margin.
Margin versus markup
Markup uses cost as the base: 40 ÷ 60 = 66.7%. The same sale is a 40% margin and a 66.7% markup. Mixing them up is the most common pricing error, and it quietly eats your profit.
Setting a price from a target margin
Price = Cost ÷ (1 − target margin). For a 25% margin on an item costing 30, divide 30 by 0.75 to get 40.
What gross margin does not include
Gross margin ignores rent, wages, advertising and delivery. A healthy gross margin can still leave a loss once those are paid, so treat it as a starting point.
Quick checklist
- Use the full landed cost, including shipping and duty.
- Calculate margin on every product, not only the average.
- Recheck when supplier prices change.
Putting it into practice
Take a product that costs 18 and sells for 30. Gross profit is 12 and margin is 40%. If delivery costs you 3 per order, the real profit falls to 9 and the margin to 30%. Running this check on each product shows which items deserve more advertising and which should be repriced or dropped.
Try it yourself
Use our free profit and loss calculator to check your numbers instantly.