How it works
Gross profit = price − cost
Margin = gross profit ÷ price
Markup = gross profit ÷ cost
Price for a target margin = cost ÷ (1 − margin)
Margin and markup use the same dollars of profit but divide by different numbers. Margin divides by the price, so it can never reach 100%. Markup divides by the cost, so it can be any size.
A worked example
A handyman buys a part for $80 and charges $120 installed. Gross profit is $40. Markup is $40 ÷ $80 = 50%. Margin is $40 ÷ $120 = 33.3%. If he wanted a true 50% margin, he’d need to charge $80 ÷ (1 − 0.50) = $160.
| Markup | Margin |
|---|---|
| 25% | 20.0% |
| 33.3% | 25.0% |
| 50% | 33.3% |
| 66.7% | 40.0% |
| 100% | 50.0% |
| 150% | 60.0% |
| 200% | 66.7% |
Common mistakes
- Adding a markup and calling it a margin. A 50% markup is only a 33% margin.
- Leaving out direct labor. If you or a worker spend two hours on the job, that time is part of the cost.
- Judging margin on one sale instead of the whole month. Discounts, redos and free extras pull the real number down.
What this doesn’t tell you
This is gross margin: it ignores rent, insurance, software, advertising and your own pay. A healthy gross margin can still leave a business losing money if overhead is high. Use the break-even calculator to see whether your margin covers your fixed costs.
Related calculators
Go deeper: 15 Numbers Every Small Business Owner Should Know, from The Groundwork Review.
Anticipated Questions
What is a good profit margin for a small business?
It depends on the industry. A grocery store and a consulting firm live on very different margins. Rather than chase a universal number, check that your gross profit covers your fixed costs and your pay at a volume you can actually sell. That is what the break-even calculator shows.
Is margin or markup better for pricing?
Use whichever you like to set prices, but know the conversion. Most owners think in markup and their accountant reports margin. Confusing the two is how a business that planned on 50% ends up with 33%.
Should labor be in the cost?
Yes, for the labor spent on that sale. If you do the work yourself, count your time at a fair wage, or your margin will look better than the business really is.
What's the difference between gross margin and net margin?
Gross margin subtracts only the cost of each sale. Net margin subtracts everything: overhead, interest and taxes. This calculator shows gross margin.
Sources
Last reviewed October 19, 2026. How our calculators work. General information for planning, not legal, tax or financial advice. Found an error? Email info@groundworkbusinessadvisory.com.
