Calculate gross profit margin, net profit margin, and markup percentage. Understand your business profitability.
Margin and markup are often confused but calculated differently:
Given: A clothing store sells a jacket for $120 that cost $75 to purchase.
Solution:
Revenue = $120, COGS = $75
Gross Profit = $120 - $75 = $45
Gross Margin = ($45 / $120) × 100% = 37.5%
Markup = ($45 / $75) × 100% = 60%
Given: A restaurant has $50,000 monthly revenue, $15,000 food costs, and $25,000 operating expenses.
Solution:
Revenue = $50,000, COGS = $15,000, Expenses = $25,000
Gross Profit = $50,000 - $15,000 = $35,000
Gross Margin = ($35,000 / $50,000) × 100% = 70%
Net Profit = $50,000 - $15,000 - $25,000 = $10,000
Net Margin = ($10,000 / $50,000) × 100% = 20%
Given: A SaaS company generates $1,000,000 annual revenue with $200,000 in costs and $500,000 operating expenses.
Solution:
Gross Profit = $1,000,000 - $200,000 = $800,000
Gross Margin = 80%
Net Profit = $1,000,000 - $200,000 - $500,000 = $300,000
Net Margin = 30%
Software companies typically have high gross margins.
Given: Compare Business A ($100K revenue, $20K net profit) vs Business B ($200K revenue, $30K net profit).
Business A: Net Margin = $20K / $100K = 20%
Business B: Net Margin = $30K / $200K = 15%
Business A is more efficient at converting revenue to profit, even though Business B has higher absolute profit.
Given: A product costs $40 to make. You want a 25% profit margin. What should be the selling price?
Solution:
Using the formula: Selling Price = Cost / (1 - Margin)
Selling Price = $40 / (1 - 0.25)
Selling Price = $40 / 0.75 = $53.33
Verify: ($53.33 - $40) / $53.33 = 25%
Gross Profit Margin measures how efficiently a company produces its goods. It shows the percentage of revenue retained after accounting for the direct costs of production.
Net Profit Margin measures overall profitability after all expenses, including operating costs, interest, and taxes. This is the "bottom line" metric.
Profit margins vary significantly by industry:
The key difference is the denominator used:
A 50% markup results in a 33.3% margin. Always clarify which method you're using when discussing pricing.