Profit Margin Calculator

Margin & Pricing Calculator

What Is Profit Margin

Profit margin shows how much money you actually keep after covering your costs.

When your business earns revenue, not all of that money is profit. You still pay for labor, materials, rent, software, and taxes. Profit margin turns all of those expenses into a single, clear percentage that answers one important question:

For every dollar I earn, how much do I keep?

If your profit margin is 20%, you keep 20 cents of every dollar as profit. The remaining 80 cents goes toward running the business.

That’s why profit margin matters. It cuts through the noise and shows whether your work is truly paying off or just keeping you busy.

What Profit Margin Actually Tells You

Profit margin tells you how healthy your business really is, not just how busy it looks.

You can make sales every day and still struggle to grow. That usually happens when costs quietly eat away at what you earn. Profit margin brings those costs into focus and shows whether your pricing and spending actually work together.

Why revenue alone does not reflect profitability

Revenue only shows how much money comes in. It doesn’t show what’s left after paying for labor, supplies, rent, or tools.

Sales can increase while your take-home stays flat—or even drops. Profit margin reveals that gap and shows whether growth is helping or hurting your business.

How business owners use profit margin to evaluate performance

Business owners use profit margin as a simple performance check.

Instead of asking, “Did we sell more this month?” they ask, “Did we keep more of what we earned?” That shift changes how performance is measured.

Profit margin helps owners:

• Compare different months without guessing
• See whether growth is improving the business
• Spot problems early when costs rise faster than revenue

For example, if sales increase but profit margin drops, something is costing more time or money than before. If profit margin improves, pricing, efficiency, or cost control is likely working.

Over time, profit margin becomes a benchmark. Owners track it to see whether changes—like raising prices, cutting expenses, or adjusting workloads, actually move the business forward.

Profit Margin Formula

The profit margin formula shows, in one line, how much of your revenue turns into profit.

Profit Margin = (Profit ÷ Revenue) × 100

This formula makes it easy to compare performance over time, even as your business grows.

What the formula inputs mean

The profit margin formula uses only a few numbers, but each one needs to be accurate.

• Revenue:  The total money your business brings in during a specific time period, before expenses.
• Costs:  The expenses required to operate the business, including labor, materials, rent, software, and utilities.
• Profit:  What’s left after costs are subtracted from revenue.

The formula works because it stays grounded in real numbers. If revenue or costs are off, your profit margin will be too. Always match the same time period for both.

Profit margin example (restaurant)

Here’s a real-world restaurant example.

A small restaurant earns $50,000 in revenue in one month from food, drinks, and takeout. That sounds strong, until you look at the costs:

• Food and ingredients: $17,000
• Labor (kitchen staff, servers, managers): $18,000
• Rent and utilities: $6,000
• Supplies and small equipment: $2,000
• Other operating costs: $2,000

Total monthly costs: $45,000

To find profit:

$50,000 − $45,000 = $5,000 profit

Now apply the formula:

$5,000 ÷ $50,000 × 100 = 10% profit margin

This means the restaurant keeps 10 cents of every dollar earned. The other 90 cents goes toward operating costs.

This example shows why profit margin matters. A restaurant can feel successful day to day, but small changes in food costs, labor hours, or pricing can quickly shrink that 10%. Tracking profit margin helps owners see where money actually goes and where adjustments matter most.

How to Calculate Profit Margin Step by Step

If the formula feels abstract, breaking it into steps makes it easier to follow. Just make sure you use the same time period for every number.

Step 1: Add up revenue for the time period

Choose a time frame, such as a week, month, or year. Add up all the revenue earned during that period before expenses.

If you’re calculating profit margin for last month, only include revenue from that month.

Step 2: Add up costs for the same time period

List every cost required to run the business during that same period. Include labor, materials, rent, utilities, software, and operating expenses.

Accuracy matters here. Missing costs can make your profit margin look better than it really is.

Step 3: Subtract costs from revenue to find profit

Subtract total costs from revenue. The result is your profit.

A positive number means you made money. A negative number means costs were higher than revenue.

Step 4: Divide profit by revenue to get profit margin

Divide profit by revenue and multiply by 100. The result is your profit margin.

This percentage shows how much of each dollar stays in your business after expenses. When you track it regularly, profit margin becomes a clear signal of whether your business is moving in the right direction.

Gross Margin Explained and When to Use It

If profit margin shows the full picture, gross margin zooms in on pricing and direct costs.

It answers one focused question:

Are my products or services priced high enough to cover their direct costs?

Gross margin focuses on cost of goods sold (COGS) expenses directly tied to delivering what you sell, such as ingredients, materials, or job-specific labor.

You use gross margin to:

• Check whether pricing makes sense
• Compare profitability across products or services
• Spot rising material or labor costs early

If gross margin is strong but profit margin is weak, overhead costs like rent or admin labor are usually the issue. If both margins are low, pricing or direct costs need attention.

Gross margin doesn’t replace profit margin. It gives you another lens to see where money is earned and where it leaks.

The gross margin formula

The gross margin formula focuses only on direct costs.

Gross Margin = (Revenue − Cost of Goods Sold) ÷ Revenue × 100

Instead of subtracting all expenses, you subtract COGS. This makes gross margin especially useful for pricing decisions.

Gross margin example for a product business

Imagine an online store that sells custom notebooks.

Monthly revenue: $6,000

Direct costs:

• Materials: $2,100
• Packaging and shipping: $600
• Production labor: $900

Total COGS: $3,600

Now calculate gross margin:

($6,000 − $3,600) ÷ $6,000 × 100 = 40%

This means the business keeps 40 cents of every dollar sold to cover operating costs and profit.

For product businesses, tracking gross margin helps catch rising costs early—before they quietly reduce profitability.