How to Calculate Profit Margin: Formula and Examples

Gross margin vs net margin

Gross profit margin uses only the direct cost of the product (your cost of goods sold):

Gross margin = (revenue − cost of goods sold) ÷ revenue × 100

Net profit margin uses every cost of running the business, including fees, shipping, advertising, software, rent and your own pay:

Net margin = net profit ÷ revenue × 100

Gross margin tells you whether a product is priced well. Net margin tells you whether the business is profitable. Our guide to how to calculate cost of goods sold explains what belongs in COGS.

Worked example: an Etsy candle

You sell a candle for $30 on Etsy.

• Materials and jar: $8
• Packaging: $1.50
• Etsy fees (listing, transaction and processing): $3.30
• Profit: $30 − $8 − $1.50 − $3.30 = $17.20
• Margin: 17.20 ÷ 30 = 57.3%

If you offer free shipping and the postage costs you $5, profit drops to $12.20 and the margin to 40.7%.

Worked example: an Amazon FBA product

You sell a kitchen gadget on Amazon for $25. It costs $6, and Amazon's referral fee, FBA fee, surcharge and plan share come to about $8.50.

• Profit: $25 − $6 − $8.50 = $10.50
• Margin: 10.50 ÷ 25 = 42%

Add $3 of advertising per sale and the margin falls to 30%.

How to price for a target margin

Turn the formula around to find the price that gives the margin you want:

Price = total cost ÷ (1 − target margin)

For a product that costs $18 and a target margin of 40%: 18 ÷ 0.6 = $30. Adding 40% to the cost ($25.20) only gives a 28.6% margin. That is the classic margin vs markup mistake; read profit margin vs markup to avoid it.

When fees are a percentage of the price, include them in the divisor: price = fixed costs ÷ (1 − fee % − target margin). The handmade pricing calculator does this automatically.

What is a good profit margin?

There is no single answer, but as a rough guide for online sellers:

• Below 20% net: little room for discounts, ads or mistakes.
• 20–40% net: healthy for most small online shops.
• Gross margins of 50% or more are common targets for handmade and private-label products, because fees, ads and overheads still have to come out.

Compare margins between your own products and platforms rather than chasing an industry average.

Common mistakes

1. Forgetting fees and shipping. They are often 15–35% of the price.
2. Using markup instead of margin.
3. Including VAT or sales tax in revenue. Tax you collect isn't yours.
4. Ignoring your time. If you don't pay yourself, your margin is overstated.
5. Not checking margins after discounts. A 20% sale on a 40% margin product halves your profit. See how to run a sale without losing money.

The bottom line

Margin is profit divided by price. Include every cost of the sale, price for a target margin with cost ÷ (1 − margin), and check your numbers regularly with the profit margin calculator.

Fee figures in the examples use US rates checked in October 2026.