How to Calculate Profit Margin for a Small Business (With Examples)

Revenue tells you how busy you were. Profit margin tells you whether all that work paid off. Two shops can each sell $5,000 in a month and end up in completely different places — one keeping $2,000, the other barely $500. This guide covers the formula, worked examples, and the mistakes that quietly inflate the number.

The profit margin formula

Gross profit margin = (selling price − cost) ÷ selling price × 100

Example: you buy a phone case for $6 and sell it for $10. Gross profit is $10 − $6 = $4. Margin is $4 ÷ $10 = 40%. In other words, 40 cents of every dollar that product brings in is yours before rent, wages and other overheads.

Margin vs markup

Markup uses the same profit but divides by the cost instead of the price: markup = (price − cost) ÷ cost × 100. For the same phone case, markup is $4 ÷ $6 = 66.7%.

The trap: if you want a 50% margin and add a 50% markup, you only get a 33.3% margin. To hit a target margin, use price = cost ÷ (1 − target margin). For a $6 item and a 40% target, that's $6 ÷ 0.60 = $10.

Gross margin vs net margin

Gross margin only subtracts the cost of the goods you sold. Net margin also subtracts everything else — rent, wages, card fees, software, delivery. Gross margin tells you whether your pricing works; net margin tells you whether the business works. Start by getting gross margin right: if it's too thin, no amount of cost-cutting elsewhere will save you.

Calculating margin for a whole month

Per-product margins are useful, but what matters is the total. Add up the revenue from every sale in the period, add up what those goods cost you, and apply the same formula:

Monthly gross margin = (total revenue − total cost of goods sold) ÷ total revenue × 100

Example: $5,000 in sales, $3,100 in cost of goods sold → gross profit $1,900 → margin 38%.

Five mistakes that inflate your margin

1. Counting sales tax as revenue. Tax is collected for the government. A $10 sale with 16% tax brings in $11.60, but only $10 of it is revenue.
2. Ignoring discounts. A 10% discount on a 40% margin product doesn't leave 30% — it leaves about 33% of the discounted price, and your profit per sale drops by a quarter.
3. Forgetting refunds. A returned item generates neither revenue nor cost of goods. Leave refunds in and the month looks better than it was.
4. Recalculating old sales with today's cost. If your supplier raises prices, last quarter's profit shouldn't change. Record the cost at the moment of each sale.
5. Leaving costs blank. A product with no recorded cost looks like 100% profit. Treat a missing cost as unknown, not free.

Most profitable vs best-selling

Your best seller and your most profitable product are often different. A $4 accessory with a 70% margin sold 50 times earns $140; a $200 item with a 10% margin sold twice earns $40. Ranking products by profit contribution, not units, shows you what to reorder first, what to promote, and what to reprice.

Tracking it without spreadsheets

A spreadsheet works until you have more than a handful of products and discounts, refunds and changing supplier prices start piling up. A POS app that records the cost of each sale does this automatically. In SellStock, you set a cost price once per product and the Reports screen shows gross profit, cost of goods sold and margin for any period — tax excluded, discounts and refunds accounted for — plus a ranking of your most profitable products.

Frequently asked questions