The Best Way to Calculate Profit Margin for Small Businesses

Many small business owners focus entirely on "Revenue" (the total money coming in). But revenue doesn't tell the whole story. You can make $100,000 a month and still be losing money if your expenses are $110,000.

To understand the health of your business, you need to look at your Profit Margin.

Gross Margin vs. Net Margin

Gross Margin: This looks at the difference between the selling price of a product and the cost of making it (COGS). It doesn't include things like rent or marketing.

Net Margin: This is the "real" profit. It takes every single expense into account.

How to Calculate Profit Margin

The formula is simple: **((Revenue - Cost) / Revenue) * 100 = Profit Margin %

For example, if you sell a product for $100 and it costs you $60 to produce and ship:

$100 - $60 = $40 Profit

$40 / $100 = 0.4**

0.4 * 100 = 40% Margin

Using a Profit Margin Tool

To quickly check your pricing strategy, use our Profit Margin Calculator. You can plug in your cost and desired margin to find out exactly what you should be charging your customers.

Improving Your Margins

Reduce Costs: Can you find a cheaper supplier or reduce shipping waste?

Increase Value: Sometimes adding a small feature or improving the packaging allows you to charge significantly more.

Bundle Products: Selling items together often increases the average order value without significantly increasing the shipping cost.

If you are a freelancer instead of a product-based business, you might find our Freelance Hourly Rate Calculator more useful for setting your service prices. Don't forget to account for GST/Tax in your final invoices!