Profit Margin Formula: How to Calculate It
A formula that looks simple on paper causes more pricing mistakes than almost any other seller calculation — usually because of what does or doesn't get included in 'cost.' This breaks down the formula precisely, with the mistakes that quietly inflate a margin number.
By Marginory team · Online sellers with hands-on experience across Etsy, Shopify & PODUpdated Fee data verified against official platform documentation
The formula
Profit margin (%) = (Revenue − Cost) ÷ Revenue × 100
Margin is calculated as a percentage of the selling price— that's the detail that trips people up. A $30 item that costs $21 has a margin of ($30 − $21) ÷ $30 = 30%. The denominator is revenue, not cost.
Worked example
The mistake that inflates margin numbers
The most common margin calculation error is using only product/material cost in the formula, ignoring platform fees, shipping you absorb, and ad spend. A seller who calculates margin this way on Etsy might see a 45% number that's actually closer to 30% once the platform's roughly 10-15% fee cut is included. This gap compounds — a business planned around an inflated margin figure can look profitable on paper while actually running thin or negative.
Margin vs. markup — related but not interchangeable
Margin and markup are often confused because they describe the same underlying dollar profit, just as a percentage of two different bases. Margin uses selling price as the denominator; markup uses cost. This means a target margin and a target markup with the same percentage number produce different prices — a frequent source of pricing errors when the two terms get swapped.