Transparent method
The formula
Worked example
Example inputs
How to interpret the result
Margin and markup describe the same dollar gap between cost and price, but they divide by different numbers, and the difference between the two answers widens as the margin runs higher. A business that sets prices intending a 50% margin but calculates it as a 50% markup on cost is quietly pricing itself at a 33% margin instead, a gap that compounds across every sale in the catalog.
Before you rely on it
What to check
Confirm the denominator. Margin divides by the selling price; markup divides by the cost. The same dollar gap produces two different percentages depending on which one is used.
The common error
Where people go wrong with gross margin calculator
Using markup and margin interchangeably in a pricing conversation. A 40% markup and a 40% margin are not the same selling price, and treating them as synonyms leaves real money on the table on every unit sold.
Sensitivity evidence
How cost of goods sold changes the gross margin
| Cost of goods sold | Gross margin | Gross profit |
|---|---|---|
| $120,000 | 52.0% | $130,000 |
| $135,000 | 46.0% | $115,000 |
| $150,000worked example | 40.0% | $100,000 |
| $165,000 | 34.0% | $85,000 |
| $180,000 | 28.0% | $70,000 |
Every input, tested
Which input moves the gross margin most
| Input | Tested from | To | Gross margin at each end | Swing |
|---|---|---|---|---|
| Revenue | $225,000 | $275,000 | 33.3% to 45.5% | 12.1% (30%) |
| Cost of goods sold | $135,000 | $165,000 | 46.0% to 34.0% | 12.0% (30%) |
Two variables at once
Gross margin by cost of goods sold and revenue
| Cost of goods sold \ Revenue | $200,000 | $250,000 | $300,000 |
|---|---|---|---|
| $120,000 | 40.0% | 52.0% | 60.0% |
| $135,000 | 32.5% | 46.0% | 55.0% |
| $150,000 | 25.0% | 40.0% | 50.0% |
| $165,000 | 17.5% | 34.0% | 45.0% |
| $180,000 | 10.0% | 28.0% | 40.0% |
Step by step
The worked example, input by input
| Input | Value used |
|---|---|
| Revenue | $250,000 |
| Cost of goods sold | $150,000 |
| Gross margin | 40.0% |
| Gross profit | $100,000 |
Where the inputs come from
Revenue is what customers paid for the period, net of returns and discounts, taken from the income statement. Cost of goods sold covers only the direct costs of what you sold: materials, direct labor and freight in, and manufacturing costs, but not rent, marketing or administrative salaries. If you sell services, use the direct delivery labor as the cost. Keep the two figures on the same period and the same accounting basis so the margin compares cleanly.
When the result stops applying
Gross margin says nothing about overhead, so a business with a healthy margin can still lose money if operating costs are too high. What counts as cost of goods sold differs between companies, which makes cross-company comparisons shaky. Margin is not the same as markup: a 40% margin corresponds to a 66.7% markup on cost, and confusing the two prices products too low.
What to compare it with
Turn the margin into a price with the target price calculator, and see markup for the same numbers from the cost side. The gross profit calculator gives the dollar figure, and the operating and profit margin pages continue down the income statement. If margins are low, look at supplier prices and discounting before cutting overhead.
People also ask
Frequently asked questions
What is a good gross margin?
It varies widely by industry. Retail and food often run 20% to 40%, manufacturing about 25% to 45%, and software or online services can exceed 70%, so compare with peers.
How is gross margin different from net margin?
Gross margin subtracts only direct costs of goods sold. Net margin subtracts every expense, including overhead, interest and tax, so it is always lower.
What costs belong in cost of goods sold?
Direct materials, direct labor, freight-in and manufacturing overhead tied to production. Selling, marketing and administrative costs are operating expenses, not cost of goods sold.