What is gross margin?
Gross margin is the share of the selling price that is profit after the cost of the product. If you sell something for $20 that costs $12 to make, your gross profit is $8 and your gross margin is $8 ÷ $20 = 40%.
Margin is always a percentage of the selling price. That is what makes it useful: it tells you how much of every dollar of sales you keep to pay overheads and profit.
Margin formulas
| To find | Formula |
|---|---|
| Gross profit | price − cost |
| Gross margin % | (price − cost) ÷ price × 100 |
| Price from target margin | price = cost ÷ (1 − margin) |
| Cost you can afford | cost = price × (1 − margin) |
| Markup from margin | markup = margin ÷ (1 − margin) |
Example: you want a 60% margin on a product that costs $8. Price = $8 ÷ (1 − 0.60) = $20. Check: ($20 − $8) ÷ $20 = 60%.
Margin vs markup
Margin and markup both describe the difference between cost and price, but from opposite ends. Margin divides profit by price; markup divides profit by cost. A $10 item sold for $15 has a 50% markup but only a 33.3% margin. Mixing them up is one of the most common pricing errors, and it nearly always leads to underpricing.
| Margin | Equivalent markup |
|---|---|
| 20% | 25% |
| 33.3% | 50% |
| 40% | 66.7% |
| 50% | 100% |
| 60% | 150% |
| 75% | 300% |
Use the markup calculator if you think in markup.
What is a good margin?
It depends on the business model. Wholesale brands often target around 50% gross margin on wholesale sales; independent retailers using keystone pricing also earn 50%; distributors and grocery retailers typically operate on thinner margins and make it up on volume. A margin is "good" if, after overheads, it leaves the profit you need at the volume you can realistically sell.
Margin at different stages
If you sell wholesale, two margins matter: yours and the retailer's. The wholesale price calculator shows both, and our guide to pricing products for wholesale explains how to set them together.
When your prices are set, publish them in a price list that your customers can always find.