Profit is a dollar amount. Profit margin is profit expressed as a percentage of revenue. That distinction makes businesses of different sizes easier to compare and helps a seller see whether growth is actually improving the economics.
Gross margin subtracts cost of goods sold from revenue. Net margin goes further by subtracting operating costs. For a useful comparison, every number needs to cover the same product, order, or accounting period.
The gross margin formula
Gross profit equals revenue minus cost of goods sold. Gross margin equals gross profit divided by revenue, multiplied by 100. If revenue is $100 and cost of goods is $40, gross profit is $60 and gross margin is 60%.
- Gross profit = revenue − cost of goods sold
- Gross margin = gross profit ÷ revenue × 100
- Use consistent cost classification
- A higher percentage is not automatically better without context
The net margin formula
Net profit subtracts operating costs from gross profit. Net margin divides that result by revenue. Marketplace fees, software, labor, advertising, refunds, and overhead need consistent placement if you compare months.
Reverse a target margin into required revenue
When costs are known, required revenue equals total costs divided by one minus the target margin as a decimal. If total costs are $70 and target margin is 30%, required revenue is $100.
Avoid mixing margin and markup
Margin divides profit by revenue. Markup divides profit by cost. A product bought for $50 and sold for $100 has a 100% markup but a 50% margin. Using the wrong denominator produces pricing mistakes.
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Frequently asked questions
What is the formula for profit margin?
Profit margin equals profit divided by revenue, multiplied by 100.
What is the difference between gross and net margin?
Gross margin subtracts cost of goods sold. Net margin also reflects operating costs and other expenses included in the calculation.
Can profit margin be negative?
Yes. When total costs exceed revenue, profit and the corresponding margin are negative.