How to calculate profit margin
Profit = Selling price − Product cost
Profit margin % = (Profit ÷ Selling price) × 100
Markup % = (Profit ÷ Product cost) × 100
Both margin and markup use the same profit figure. The only difference is what you divide by: margin divides by the price, markup divides by the cost.
Worked example
You sell a leather wallet for $50. It costs you $30 to buy from your supplier, landed at your warehouse.
| Metric | Calculation | Result |
|---|
| Profit | $50 − $30 | $20 |
| Profit margin | $20 ÷ $50 | 40% |
| Markup | $20 ÷ $30 | 66.7% |
So the wallet has a 40% margin and a 66.7% markup. Same product, same price, two very different-looking percentages.
Margin vs markup: why the difference matters
Markup is always higher than margin for the same product, and mixing them up is one of the most expensive mistakes a store owner can make. If you want a 40% margin and you add 40% to cost, you get a $42 price on a $30 item, which is only a 28.6% margin. That gap is often the entire profit you were counting on to fund Google Ads.
A quick reference:
| Markup | Resulting margin |
|---|
| 25% | 20% |
| 50% | 33.3% |
| 100% | 50% |
| 200% | 66.7% |
Margin can never reach 100%, while markup has no ceiling. If you set prices by markup, use the markup calculator and check the resulting margin. If you start from a target margin, the selling price calculator works backward to the right price.
What is a good profit margin?
There is no universal "good" margin. It depends on:
- Product category. Commodity electronics and branded resale often run thin margins; private label, apparel, beauty and accessories usually have much more room.
- Order value. A 20% margin on a $900 item produces more dollars per order than a 60% margin on a $15 item.
- Your acquisition model. If most sales come from paid ads, you need enough margin to cover the cost per sale and still profit. Stores that sell mostly to repeat customers or through organic traffic can live on less.
- Hidden costs. Payment fees, free shipping, packaging and returns all eat into the real margin. Include them in "product cost" if you want a realistic number.
As a practical test, compare your margin to your advertising efficiency. A product with a 40% margin breaks even at a 2.5 ROAS; anything below that loses money on every ad-driven sale. The break-even ROAS calculator shows this for any margin.
How to improve your profit margin
- Use true landed cost. Add freight, duties and inbound shipping to the supplier price. Many stores overstate margin by 5 to 10 points by ignoring these.
- Raise prices on low-elasticity products. Test small increases on best sellers with strong reviews; small price moves often have little effect on conversion rate.
- Bundle and upsell. Bundles raise order value while fixed costs per order (packing, shipping) stay roughly flat.
- Negotiate volume tiers once you have consistent sales data to show suppliers.
- Push ad budget toward high-margin products. In Google Shopping and Performance Max, split products into campaigns or asset groups by margin tier and give each its own ROAS target, so low-margin items are not bid as aggressively as high-margin ones.