Table of Contents
- How to use our margin calculator?
- Remember not to mix net and gross values.
- Decide if you are interested in gross or net margin.
- How to calculate the gross margin?
- How to calculate the (net) profit margin?
- How to calculate the markup?
- How to determine the profitable selling price?
- How to calculate the cost of goods or services?
- How do I calculate the markup percentage from the margin ratio?
- How do I calculate the margin in Google Spreadsheet?
- Real life examples
- Profit margin in retail store
- Profit margin in an ecommerce store
- Other business types:
- Gross Margin vs. Profit Margin: What's the Difference?
- What is the difference between margin and profit?
- Margin vs markup
- What is a good margin for ecommerce?
How can this website help you?
This tool is of substantial help in creating the pricing strategy for your business. Pricing of your goods and services has the biggest impact on the profitability of your company. Reasonable prices can both attract many customers and ensure that handling them will be cost-effective.
Good pricing policy is a must-have for any business, as any mistakes while calculating prices may negatively impact your income and even lead you to bankruptcy!
Using the form above you can calculate:
selling price for your products by providing costs and target margin or markup
gross margin percentage by providing the cost of goods and the retail price
markup percentage by providing the cost and the price
cost by providing the margin percentage and the price
How to use our margin calculator?
Using this tool is plain easy.
Select the target calculation.
Fill in the form
Things to keep in mind:
Remember not to mix net and gross values.
This is a very important rule. If you forget about it, all your calculations will be wrong. Sales tax (VAT) has a huge impact on your calculation. So in order to avoid any mistakes, decide in advance whether you wish to input gross or net values only.
The most common mistake is to put the net cost of a product and a gross selling price into the form (check the example below).
- net cost of goods is $50
- net selling price is $100
- margin = (net_price - net_cost) / net_price * 100% = ($100 - $50) / $100 * 100% = 50%
- net cost of goods is $50
- gross selling price is $120 (20% VAT)
- margin = (gross_price - net_cost) / gross_price * 100% = ($120 - $50) / $120 * 100% = 58%
One silly mistake in this case gives you a margin overestimated by 15% and by doing so you will inadvertently diminish your gross profit.
Decide if you are interested in gross or net margin.
Mixing the two concepts can lead to wrong conclusions, so at the beginning let's explain the difference between them.
gross margin - represents the percentage of revenue that exceeds the cost of a good or a service, without considering any other costs
net profit margin - represents the percentage of revenue that exceeds all the costs related to the transaction (cost of goods, packing, shipping, commission fee, etc.)
How to calculate the gross margin?
The gross margin formula is very simple:
M = (P - C) / P * 100%
- M - margin
- P - selling price
- C - costs
Where price represents the selling price and cost represents cost of goods. Please also remember to not mix net and gross values. Price and cost should be both net or gross values.
How to calculate the (net) profit margin?
The equation for the net profit margin is similar to the previous one. The key difference concerns costs. In this case, you should include all the expenses related to the transaction in the costs field.
M = (P - C) / P * 100%
Costs should include here all the costs, for example:
- commission fees
- packing materials
How to calculate the markup?
In order to calculate the markup you can use the equation below:
MR = (P / C) * 100%
MR = markup
P = selling price - cost
C - cost of goods
How to determine the profitable selling price?
In order to derive the selling price from the margin equation you need to convert it as follows:
P = C / (1 - M)
Important! The equation above can use both gross margin and profit margin. If you want to make sure you won’t make a mistake you should enter:
cost of goods if you are using the gross margin
all variable costs if you are using the profit margin
How to calculate the cost of goods or services?
If you would like to find the costs, already knowing the selling price and the target margin, simply use the formula below:
C = P - P*M
How do I calculate the markup percentage from the margin ratio?
In order to derive the markup from the margin use the formula below:
MR = (1 / (1 - M) - 1) * 100%
Of course all of the above arithmetic can be performed using Calcopolis, but sometimes it's more practical to use a spreadsheet if you wish to perform bulk operations.
If you are about to recalculate prices for your entire inventory it is more convenient to use Microsoft Excel or Google Spreadsheet.
How do I calculate the margin in Google Spreadsheet?
Since transferring the above formulas to a spreadsheet is very simple, we will cover more practical examples.
In the sheet below we will try to calculate the margin of a bunch of products including the net purchase cost and Value Added Tax (VAT).
For the purpose of this example we prepared the sheet below.
columns from A to D are product data
column B (Net cost) represents the cost of a product without VAT
column C (VAT) represents the sales tax in your country
column D (Gross Selling Price) is the price presented to the customer
column E represents the margin formula, with a small enhancement for handling VAT
Take note that in order to achieve valid results we need to convert the cost of products to the gross value.
Real life examples
Profit margin in retail store
In order to find an average profit margin of your retail business you need to consider all the costs related to the transaction. For example:
cost of goods sold (COGS)
transactions fees for card payments
profit_margin = (R - C) / R * 100%
- R - revenue - value of all products sold in period of time
- C - all the variable costs related to transactions
- profit_margin - average profit margin your company operates on
Take note that fixed costs are excluded deliberately. Rental costs, advertisements, etc., are not considered when calculating the profit margin, since it is not the final profit of a company.
Profit margin in an ecommerce store
Using the previous example you can calculate the average profit margin of an online store. The key difference concerns the cost structure. In the case of ecommerce you have to consider:
- cost of goods sold (COGS)
- transactions fees for payment gateways, Amazon or eBay commissions
- shipping cost
Other business types:
You can apply a similar approach to any kind of business, for example a restaurant, wholesale distribution, manufacturing company or even a service company.
Each case will have a different cost structure, but the general principle will stay the same.
cost of goods sold (COGS) - value of products a company bought in order to resell them to customers
gross margin - represents the percentage of revenue that exceeds the cost of goods or service, without considering any other costs.
net margin (profit margin) - is a measurement of sales profitability, representing the percentage of revenue that exceeds all the costs related to the transaction (cost of goods, packaging, shipping, commission fee, etc.)
markup - the amount added to the COGS in order to cover all the costs and profit
selling price - final amount the customer paid for a product or service, in other words it is a company’s total revenue from the transaction
Gross Margin vs. Profit Margin: What's the Difference?
Those similar terms are quite often misunderstood. While both of them are used to describe income from sales, the key difference lies in the considered factors.
The most basic of the two is gross margin, which is just a ratio between revenue that exceeds the cost of goods and the selling price.
Profit margin on the other hand comprises all company's costs related directly or indirectly to the transaction: not only the cost of goods, but all the commissions, discounts, used materials, rentals, salaries, and even taxes.
Customers order pizza with delivery:
- customer pays $20 for pizza with “free” delivery
- ingredients cost $7
- delivery costs $5
- card payment fee equals $1
- cardboard packaging costs $0,5
- sales tax $2
In order to calculate the gross margin we use the selling price of $20 and the ingredients’ cost of $7. This will give us a 65% margin.
In order to calculate the profit margin we will need to include all the costs listed above, which are $15,5 in total. This will give us a 22.5% margin.
What is the difference between margin and profit?
The example above raises another question: how to calculate the real profit for a company.
In order to calculate your profit you may use the following formula:
profit = revenue * profit_margin
Margin vs markup
What is a good margin for ecommerce?
The answer to this question is not as simple as it might seem. There are many factors that determine the margin you should set for your products.
For example, if you sell a product that is in high demand and there is little competition, then you can afford to set a lower margin. On the other hand, if your product is not in high demand or there are many competitors selling the same thing, then you will have to set a lower price to make sure that it sells well.
Regardless of the market sector you are in, there are two constraints on our margin level.
Therefore the prices
should not be much higher than the prices of alternative products offered by competitors, otherwise they will have a negative impact on your net sales
cannot be too low, as low prices will undermine your marketing budget.
Although the constraint on high prices is rather obvious, many entrepreneurs forget about the second one. They may have a very attractive offer, but no one knows about it because they have no budget for ads.
Nowadays most online stores spend over 20% percent of turnover on marketing. Even the Amazon FBA commision for each transaction is 15%. So while calculating your margin you should take that fact into account.