Margin and markup are not the same number
A bag of coffee costs you $6 and sells for $10. You made $4.
Divide that $4 by the $10 price and you get a 40% margin. Divide the same $4 by the $6 cost and you get a 66.7% markup. Same sale, same profit, two different percentages. Suppliers, accountants, and investors quote margin. Most people setting prices think in markup. When one person says "we run at 40" without naming which, a pricing mistake follows.
The expensive version of this error goes like this: a shop wants a 40% margin, so the owner adds 40% to cost. A $6 item goes out at $8.40. Profit is $2.40, which is a 28.6% margin, not 40.
Use the conversion table below when a supplier or a spreadsheet hands you one figure and you need the other.
| Markup on cost | Margin on price | $10 cost sells at |
|---|---|---|
| 20% | 16.7% | $12.00 |
| 25% | 20.0% | $12.50 |
| 33.3% | 25.0% | $13.33 |
| 50% | 33.3% | $15.00 |
| 66.7% | 40.0% | $16.67 |
| 100% | 50.0% | $20.00 |
| 150% | 60.0% | $25.00 |
| 300% | 75.0% | $40.00 |
Margin = profit ÷ price. Markup = profit ÷ cost. Price for a target margin = cost ÷ (1 − margin).
Gross, operating, net: three answers to three questions
The Full P&L tab gives you three margins. Each one strips out a different layer of cost, so each one tells you something the others hide.
Gross margin
Does the product pay for itself?
Revenue minus cost of goods sold, divided by revenue. A low gross margin is a pricing or sourcing problem. No amount of trimming the office budget will fix a product you sell at 12% gross.
Operating margin
Does the business run at a profit?
Gross profit minus rent, payroll, marketing, and the rest of overhead. Healthy gross with thin operating margin points at overhead growing faster than sales.
Net margin
What is left for the owners?
Operating profit minus interest and income tax. Two firms with identical operations show different net margins if one carries debt. Compare operating margin when you want to judge how well a business is run.
The line items people put in the wrong bucket
Your gross margin is only as honest as your cost of goods sold. These four slip through most often on small-business books:
- Payment processing fees. A 2.9% + 30¢ card fee on a $32 sale is $1.23. On a product with $13.60 of profit, 9% of your profit is gone before rent. Many sellers file this under overhead and overstate gross margin by two or three points.
- Outbound shipping you pay for. "Free shipping" is a cost of the sale. If you absorb $7 per order, the $7 belongs next to the product cost when you judge whether a SKU earns its place.
- Returns and refunds. Use net sales as revenue. A 10% return rate on apparel means the top line you see in the checkout report is not the top line you keep.
- Your own labor. Solo makers leave out the hours spent producing each item. The margin looks great until you price your time at even minimum wage.
The Target Margin tab has a payment fee field for the first one. The fee gets priced into the result, since the processor takes a percentage of the final price, not of your cost.
Is 30% a good margin?
Depends entirely on the trade. A grocery store at 30% net would be extraordinary. A software company at 30% gross would be in trouble.
The ranges below are rough, drawn from public-company figures such as Aswath Damodaran's yearly margin tables at NYU Stern. Small independents usually land below the listed ranges, because they buy in smaller volumes and spread overhead across fewer sales. Treat these as a sense check, not a target.
| Type of business | Typical gross margin | Typical net margin |
|---|---|---|
| Grocery and supermarkets | 24 to 30% | 1 to 3% |
| Restaurants | 60 to 70% (food cost only) | 3 to 6% |
| General retail and ecommerce | 35 to 50% | 2 to 8% |
| Manufacturing | 25 to 40% | 5 to 10% |
| Software and SaaS | 70 to 85% | 10 to 25% |
| Consulting and agencies | 40 to 60% | 10 to 20% |
A better benchmark than any table: your own margin last quarter. A net margin sliding from 9% to 6% over three quarters tells you more than the fact both numbers sit inside an industry range.
Where this calculator stops
- One period, one product mix. SKUs with different margins don't get blended. For a weighted average, run the P&L tab on the combined totals.
- No volume modelling. To find how many units you need to cover fixed costs, the break-even calculator fits better.
- Tax is a figure you type in, not something the tool works out. Rates differ by country and business structure.
- Prices are pre-tax. If you quote VAT-inclusive prices, strip the VAT out first or the margin comes out inflated.
- Everything runs in your browser. Nothing you type gets sent to a server or stored.
