How to Calculate Gross Margin: Formula, Steps & Examples
How to calculate gross margin in one formula: margin = (price − cost) ÷ price × 100%. Step-by-step examples, the reverse formula for pricing, and common mistakes.
“How do I calculate gross margin?” is one of the most-searched finance questions — and the answer is a single formula.
The gross margin formula
Gross margin = (Price − Cost) ÷ Price × 100%
- The numerator (price − cost) is your per-unit profit
- The denominator is price, not cost — this is where most mistakes happen
Three worked examples
Example 1: A jacket sells for $200 and costs $120. Profit = $80; margin = 80 ÷ 200 = 40%.
Example 2: A coffee sells for $5 with $2 of ingredients and cup. Margin = (5 − 2) ÷ 5 = 60% — the classic café “60% gross margin”.
Example 3 (the common trap): Your product costs $80 and you want to “make 50%”. Adding 50% to cost gives a $120 price — but the actual margin is 40 ÷ 120 = 33.3%, not 50%. You just met markup vs margin. See how to convert markup to margin.
The reverse: price from a target margin
Price = Cost ÷ (1 − target margin)
Cost $50, target margin 30%: price = 50 ÷ 0.7 ≈ $71.40.
The easy way
Skip the algebra with the free margin calculator: enter any two of revenue, cost, or margin and get the third instantly. For pricing work, the pricing calculator goes from target margin to suggested price and even max acceptable cost, with Amazon and eBay fee presets.
Common mistakes
- Dividing by cost instead of price
- Treating markup as margin — 50% markup is only a 33.3% margin
- Ignoring platform fees — e-commerce sellers should deduct commissions first; try the Amazon FBA profit calculator
- Comparing against the wrong industry — check the industry average margin table first