Anthony McGrathHow to calculate profit margin
It starts with what the customer pays, takes out VAT if you are registered, then takes off every cost of getting that order to them. What is left is your profit per order.
Revenue (ex VAT) = price ÷ (1 + VAT rate)
Profit = revenue − refunds − payment fees − product − shipping − packaging − ads − other
Margin = profit ÷ revenue (ex VAT)
Markup = (revenue − product cost) ÷ product cost
Worked example
A product sells for £30 including VAT. Without VAT that is £25. Take off £0.75 of refunds (3%), £0.85 of payment fees (2% + £0.25), £9 product, £3.50 shipping and £0.60 packaging. That leaves £10.30 profit per order, a 41.2% margin. The markup on the £9 product cost is 177.8%. You could spend up to £10.30 on ads to win each order and still break even.
Price for the margin you want
Switch to Price for my margin, type the margin you want and the calculator works backwards to the price, including the payment fee on the higher price and VAT on top.
Price (ex VAT) = (all costs per order + fixed payment fee) ÷ (1 − margin − refund rate − payment fee % × (1 + VAT))
Margin is not markup
Doubling the cost of a product is a 100% markup, but only a 50% margin before your other costs. Once you add shipping, fees and returns, the margin is lower still, which is why prices that look healthy can still lose money once ads are added.
Markup to margin conversion table
| Markup | Margin | Cost £10 sells at (ex VAT) |
|---|---|---|
| 25% | 20% | £12.50 |
| 50% | 33.3% | £15.00 |
| 75% | 42.9% | £17.50 |
| 100% | 50% | £20.00 |
| 150% | 60% | £25.00 |
| 200% | 66.7% | £30.00 |
| 300% | 75% | £40.00 |
Key terms
- Profit margin
- Profit as a percentage of the selling price without VAT, after every cost of the order.
- Markup
- How much the price without VAT is above the product cost, as a percentage of that cost.
- Gross margin
- Margin after product cost only, before shipping, fees, refunds and ads.
- Contribution margin
- What each order leaves after all its variable costs, used to pay for ads, overheads and profit.
- Break-even ad spend (CPA)
- The most you can pay in advertising for one order before that order loses money.
Common questions
How do I calculate profit margin?
Take the selling price without VAT, subtract every cost of the order (product, shipping, packaging, payment fees, refunds and ads) to get profit, then divide profit by the price without VAT. A £30 sale including VAT is £25 without VAT. With £14.70 of costs, profit is £10.30 and the margin is 41.2%.
What is the difference between margin and markup?
Margin is profit as a share of the selling price (without VAT). Markup is how much you add on top of the product cost, as a share of that cost. A product that costs £10 and sells for £20 without VAT has a 100% markup but a 50% margin, before other costs.
How do I convert markup to margin?
Margin = markup ÷ (1 + markup). A 50% markup is a 33.3% margin, a 100% markup is a 50% margin and a 200% markup is a 66.7% margin. To go the other way, markup = margin ÷ (1 − margin).
How do I work out a selling price from a target margin?
Add up your costs per order, then divide by (1 − the margin you want − your refund rate − your payment fee %), and add VAT on top if you are registered. The calculator's Price for my margin tab does this for you and rounds to .99.
Should I use the price with or without VAT?
Enter the price the customer pays. If you are VAT registered, tick the VAT box and the calculator takes the VAT out first, because VAT is not your money. Margin is always worked out on the price without VAT.
What is a good profit margin for an online shop?
It depends on the product, but after product cost, shipping, payment fees and returns, many DTC brands aim for 30% or more before advertising, so there is room to pay for ads and still make a profit. Under 15% leaves very little room for ads.
How much can I spend on ads per order?
Your break-even ad spend per order is your profit before advertising. Spend more than that to win an order and you lose money on it, unless the customer buys again. The ROAS calculator turns this into the break-even ROAS for Google and Meta.
How do returns affect my margin?
Refunded orders lose the revenue but you usually still pay for shipping, packaging and payment fees. Adding your returns or refunds rate shows the margin you really keep.