How to calculate profit margin (with a calculator)
By the Chatbait team ·
Short answer: profit margin is the share of your sale price you keep after costs, as a percentage. Gross margin only takes out the cost of the product. Net margin takes out everything: payment fees, shipping, packaging, returns, ads and platform fees. Markup is a different number from margin, even though people mix them up. For a $40 product costing $14 to make, gross margin is 65%, but net margin after all the real costs can be much lower, as the worked example below shows.
Gross margin, net margin and markup: what's the difference
These three numbers all come from the same sale, but they answer different questions.
- Gross margin asks: of my sale price, how much is left after I pay for the product itself? It ignores shipping, fees and ads.
- Net margin asks: of my sale price, how much do I actually keep after every cost? This is the number that tells you if the business makes money.
- Markup asks: how much more did I charge than the product cost me? It's a percentage of the cost, not the price. This is why a 100% markup is not the same as a 50% margin, even though they describe the exact same sale.
| Term | Formula | What it's a percent of |
|---|---|---|
| Gross margin | (Price − cost of goods) ÷ Price | Price |
| Net margin | (Price − all costs) ÷ Price | Price |
| Markup | (Price − cost) ÷ Cost | Cost |
The formulas
- Gross margin % = (Price − cost of goods sold) ÷ Price × 100
- Net margin % = (Price − all costs, including fees, shipping, ads) ÷ Price × 100
- Markup % = (Price − cost) ÷ Cost × 100
Cost of goods sold (COGS) means what the product itself cost you: materials, manufacturing, or what you paid a supplier. "All costs" in net margin means COGS plus everything else it took to make and deliver that sale.
Worked example: a $40 product
Say you sell a product for $40, and it costs $14 to make or buy (COGS).
Gross margin: ($40 − $14) ÷ $40 = 0.65, or 65%
Markup, using the same numbers: ($40 − $14) ÷ $14 = 1.86, or 186%
Notice the gross margin (65%) and markup (186%) describe the same sale but look nothing alike. That's the usual source of confusion: a store owner says "I markup 100%" and assumes that means a 50% margin, which is only true at exactly double the cost.
Now add the costs that gross margin skips:
| Cost | Amount |
|---|---|
| Cost of goods | $14.00 |
| Payment processing fee | ~$1.30 (varies by provider and plan) |
| Shipping you pay | $5.50 |
| Packaging | $1.20 |
| Ad spend (allocated per order) | $4.00 |
| Returns, allocated per order | $1.00 |
| Total costs | ~$27.00 |
Net margin: ($40 − $27) ÷ $40 = 0.325, or 32.5%
That's a big drop from the 65% gross margin. The gap is every cost gross margin doesn't count.
Costs small stores forget to count
Gross margin is the number most people calculate first, because cost of goods is easy to find on an invoice. Net margin needs more digging. The costs that usually get left out:
- Payment processing fees. Every card payment costs you a percentage and sometimes a fixed fee per transaction. Rates differ by provider, by plan, and by card type (domestic vs international, debit vs credit). Check your own payment provider's pricing page for your exact rate rather than assuming one number across all orders.
- Shipping you pay. Even with "free shipping" offers, you're paying the carrier. If you don't pass the full cost to the customer, it comes out of margin.
- Packaging. Boxes, mailers, tape, inserts, tissue paper. Small per order, but it adds up across hundreds of orders a month.
- Returns and refunds. A returned order often costs you the outbound shipping, the return shipping, and restocking time, with no sale to show for it. Spread this cost across all your orders, not only the returned ones.
- Ad spend. If you run ads, divide your monthly ad spend by the number of orders those ads drove, and treat that as a per order cost.
- Platform or marketplace fees. Selling through a marketplace (Etsy, Amazon, eBay) usually means a percentage fee per sale, on top of payment processing.
Leave any of these out and your margin looks better than it really is.
Try it with your own numbers
Enter your price, product cost, shipping and payment fee below to see your real profit per order, and what happens if you run a discount.
To earn the same profit as before, you'd need 66% more orders during the sale.
Leaves out ads, packaging and returns. Payment fees vary by provider and plan, so use your own.
A simple costing sheet
Fill this in for one product to see your real net margin.
If you're deciding on a sale price or discount, it helps to know how a price cut changes this sheet before you run it. See a Black Friday checklist for small stores for when discounts tend to make sense.
Frequently asked questions
What's a good net profit margin for a small store?
There's no single right number since it depends on your category and costs. Compare against your own past months rather than a fixed target.
Why is my margin lower than I expected?
Usually because gross margin was calculated using only the cost of goods, while real costs also include payment fees, shipping, packaging, ad spend and returns. Add those in and recalculate.
Is markup the same as margin?
No. Markup is a percentage of your cost; margin is a percentage of your price. A 100% markup on a $14 product gives a $28 price. That price works out to a 50% margin.
Does a discount always reduce profit per order?
Usually yes, but the drop is often smaller than it feels, and a discount can bring in enough extra orders to make up for it. Use the calculator above with your own numbers to check before running one.
Get the template pack by email, plus new templates when we add them.
We'll email you the template pack and new templates now and then. Unsubscribe any time. Privacy.