Gross profit margin is the portion of business revenue that remains after subtracting the cost of goods sold. Business owners may use a gross profit margin calculator to better understand their financial health, make improvements, and increase their profitability. 

There are several benefits to using a profit margin calculator.

---

Planning and Pricing Strategies

Calculating your business’s gross profit margin allows you to plan for the future. Based on your results, you may need to pay more attention to your cost of goods sold or adjust prices to generate more sales.

You can also use our gross profit margin calculator to test new sales strategies and conduct trending over time.

---

Benchmarking

Benchmarking is a tool that allows businesses to see how their pricing aligns with competitor pricing strategies. It’s especially important to benchmark before making pricing decisions when there’s fierce competition in your industry or niche.

If your prices are too high, you’re almost guaranteed to be losing sales to a competitor. If they’re too low, you’re missing an opportunity to maximize your gross profit and revenue.

---

Profitability

Your gross and net profit margins are important aspects of evaluating your company’s overall profitability. In addition to showing how your business is performing, these metrics show whether your business model is effective.

---

How to Calculate Gross Margin Percentage

To calculate profit margin, use the following gross margin formula:

Gross profit margin = [(net sales – cost of goods sold)  / net sales] × 100 

For example, if you have $100K in net sales and $30K in costs of goods sold, then this is the calculation:

Gross profit margin = [($100,000 – $30,000) / $100,000] × 100
Gross profit margin = 70%

---

Gross Profit Formula

If you just want to calculate your gross profit, use this formula:

Gross profit = net sales – cost of goods sold

With net sales of $50,000 and a cost of goods sold of $25,000, the calculation would look like this: 

Gross profit = $50,000 – $25,000
Gross profit = $25,000

---

A Note on Terminology

Gross profit and gross profit margin may seem similar, but they have two slightly different meanings. It’s easy to get these terms mixed up if you don’t look carefully.

Gross profit is the amount of profit that’s left after subtracting cost of goods sold from sales revenue. It’s expressed as a fixed dollar amount. Gross margin, however, illustrates the relationship between gross profit and sales revenue as a percentage.

Therefore, you can’t use the same formula for profit margin and profit. You’ll need to use a specific gross profit margin formula if you want to perform your gross margin calculation manually instead of using the gross margin calculator.

---

Gross Profit Margin vs. Markup

Gross profit margin is a key metric for all businesses. When your gross profit margin is higher, your business is considered to be more profitable. You can use this alongside other metrics to assess your company’s performance.

Markup, on the other hand, is the amount that’s added to the cost of a good or service to create the total selling price. To calculate markup, use our markup calculator or apply the following formula:

Markup margin = [(selling price – cost) / cost] × 100

If the selling price is $100 and the cost of the item is $25, the formula would look like this:

Markup margin = [($100 – $25) / $25] × 100 
Markup margin = 300%

---

Gross Profit Margin FAQ

Learning how to find gross margin is fairly simple, but many people still have questions. Let’s review some frequently asked questions about profit margin and the various ways to calculate profit.

---

What is a good gross margin?

The threshold for a good gross margin depends on your industry. Now that you know how to determine profit margin, you can compare your profit margins and other metrics to industry benchmarks.

For instance, according to the Bank of Canada, the average gross margin for the retail apparel industry is roughly 50%. Other industries such as tech or finance have a higher percentage ranging from 70% to 80%. One of the best resources for profit margins is NYU Stern Margins by Sector. They analyze 17 margins and expense ratios for 6,481 publicly held businesses across 94 industries.

---

How do you increase profit margin?

There are many ways to increase your profit margin and overall profit percentage. If your total expenses or manufacturing costs are too high, consider revisiting these aspects of your business model:

• Removing poorly performing goods or services 
• Using offshore manufacturers 
• Substituting with cheaper raw materials
• Purchasing in bulk
• Creating economies of scale
• Locating new vendors 
• Negotiating prices with suppliers
• Automating processes

These strategies increase your profit margin by reducing the cost of goods sold. Reducing your total expenses and direct costs will lead to greater profit even if you can’t increase total revenue earned.

---

Gross profit vs. net profit margin

Gross margin and net profit margin are related concepts. Gross profit is the money left after subtracting the costs of goods sold from net sales. It measures the health and efficiency of a company by analyzing the total cost of goods sold.

Net profit margin, however, is the remaining money after all expenses and taxes are subtracted from your total sales revenue. Net profit margin shows businesses how much net revenue a company generates as a percentage.

---

How to determine net profit margin ratio

Ratios are expressed in decimal form rather than as a percentage. Net profit margin ratio can be determined with this profit margin formula:

Net profit margin ratio = net income / total revenue

If you’re looking for more information about net profit margin, check out our blog on gross and net profit margins.

---

What is the formula for net profit margin?

The net profit margin formula is similar to the one for net profit margin ratio. To calculate net profit margin as a percentage, simply multiply the ratio by 100 to convert it to a percentage:

Net profit margin = (net income / total revenue) × 100

---