Question 1

What is the difference between gross profit margin and net profit margin?

Accepted Answer

Gross profit margin measures profitability after deducting the direct cost of goods sold (COGS) — it shows how efficiently you produce or source your product. Formula: Gross Margin % = (Revenue − COGS) / Revenue × 100. Net profit margin deducts ALL costs — COGS, operating expenses (salaries, rent, utilities, marketing), interest, and taxes. Formula: Net Margin % = Net Profit / Revenue × 100. Example: Revenue £100k, COGS £40k, operating expenses £30k, tax £8k. Gross profit = £60k (60% margin). Net profit = £22k (22% margin). Gross margin tells you product profitability; net margin tells you overall business profitability.

Question 2

What is the difference between profit margin and markup?

Accepted Answer

Margin and markup both describe the relationship between cost and price, but they use different bases. Margin: Profit ÷ Selling Price × 100 — profit as a % of revenue. Markup: Profit ÷ Cost × 100 — profit as a % of cost. Example: Cost £50, Selling Price £100, Profit £50. Margin = £50/£100 = 50%. Markup = £50/£50 = 100%. The same price produces different percentages depending on which metric you use. To convert: Margin = Markup / (1 + Markup). Markup = Margin / (1 − Margin). Common mistake: using markup as if it were margin — a 50% markup is only a 33% margin.

Question 3

What is a good profit margin for a small business?

Accepted Answer

Profit margin benchmarks vary significantly by industry. Net profit margin typical ranges: Retail: 2–5% (grocery), 5–12% (clothing/electronics); Software / SaaS: 15–30% (mature products can exceed 40%); Professional services (agencies, consultants): 10–20%; Restaurants / food service: 3–9%; Construction / trades: 2–8%; Freelancers / sole traders: 20–40% (low overhead). Gross margin benchmarks: Software: 70–85%; Manufacturing: 25–40%; Retail: 30–50%; Services: 50–70%. What matters most is your trend over time and how you compare to your industry peers — an improving margin in a competitive sector is worth more than a high margin in an easy one.

Question 4

How do I calculate the selling price to achieve a target margin?

Accepted Answer

To find the selling price that achieves a target gross margin: Selling Price = Cost / (1 − Target Margin %). Examples: Target 30% margin on a £70 cost: Price = £70 / 0.70 = £100; margin check: (£100−£70)/£100 = 30% ✓. Target 50% margin on £50 cost: Price = £50 / 0.50 = £100. Target 20% margin on £80 cost: Price = £80 / 0.80 = £100. Common mistake: adding the target margin % directly to cost (markup method): £70 + 30% = £91 only gives a 23.1% margin, not 30%. Use the Selling Price Calculator tool to automate this.

Metric	Formula	Example (cost £70, price £100)
Gross profit	Revenue − COGS	£100 − £70 = £30
Gross margin %	(Revenue − COGS) / Revenue × 100	(£30 / £100) × 100 = 30%
Markup %	(Revenue − COGS) / COGS × 100	(£30 / £70) × 100 = 42.9%
Net profit	Revenue − COGS − Operating costs − Tax	Depends on full cost structure
Net margin %	Net Profit / Revenue × 100	e.g. £15/£100 = 15%
Selling price (target margin)	Cost / (1 − Target Margin %)	£70 / (1 − 0.30) = £100

Profit Margin Calculator

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