Gross Profit Margin Formula: How to Calculate Gross Margin (With Examples)

• Tahir Abbas
• October 29, 2026

Last updated: October 2026

Key takeaways

• Gross profit is a dollar amount: revenue minus cost of goods sold (COGS). Gross profit margin (also called gross margin) is that profit as a percentage of revenue.
• Markup is profit divided by cost, so it is always a bigger number than margin. A 40 percent margin equals a 66.67 percent markup.
• To set a price from a target margin, divide cost by (1 – margin). Multiplying cost by (1 + margin) gives a lower margin than you intended.
• Use net revenue (after returns and discounts) and put only direct costs in COGS. Overhead belongs below the gross profit line.
• Industry averages vary widely: NYU Stern’s January 2026 data shows U.S. sector gross margins from about 26 percent to about 72 percent in the sectors we list below.

Most pricing errors small businesses make come from mixing up three numbers that sound alike: gross profit, gross margin and markup. This guide gives you the formula, two worked examples with every step shown, a margin-to-price table, and a short list of mistakes to avoid. If you would rather not do the arithmetic by hand, use our free gross margin calculator, which returns gross profit, margin and markup from your price and cost.

What is the gross profit margin formula?

The formula has two steps. First find gross profit, then divide it by revenue:

1. Gross profit = net revenue – cost of goods sold (COGS)
2. Gross profit margin (%) = gross profit / net revenue x 100

This is the standard definition used by accounting and finance publishers. For example, Wall Street Prep defines gross margin as gross profit divided by net revenue, with net revenue equal to gross revenue less returns, discounts and sales allowances (Wall Street Prep), and QuickBooks gives the same formula using net sales (QuickBooks). The result tells you how many cents of each revenue dollar are left after paying the direct costs of what you sold. A 36 percent margin means 36 cents of every dollar is available to cover overhead and profit.

Gross profit vs gross margin vs markup: what is the difference?

All three come from the same two inputs, revenue (price) and cost. Using the same sale throughout, $50,000 of revenue against $32,000 of COGS:

The dollars are identical. Only the denominator changes. Because cost is smaller than price, markup is always larger than margin, and the gap widens as profit grows. We cover the pricing consequences in detail in our post on markup vs margin, and the small business pricing calculator lets you work in either direction.

Worked example: a product business

An online shop reports these figures for one month (illustrative numbers, not market data):

Re-check: 36 percent of $50,000 is $18,000, and $50,000 – $18,000 = $32,000, which matches COGS. Markup on the same numbers is $18,000 / $32,000 = 56.25 percent. Note that the opening-inventory method for COGS (beginning inventory plus purchases minus ending inventory) is also the one QuickBooks uses in its guide.

Worked example: a service business

Service businesses have no inventory, so COGS is the direct cost of delivering the job: crew labor, materials and subcontractors. A small landscaping company, again with illustrative numbers:

This is why gross margin alone does not tell you whether a business is healthy. A 35 percent gross margin left this company about 10.8 percent after overhead. If your overhead is $2,900 a month, you need at least $2,900 of gross profit just to break even.

How do you turn a target margin into a selling price?

This is the calculation people most often get wrong. To hit a target gross margin, divide your cost by (1 – margin):

Price = cost / (1 – target margin)

Example: an item costs you $42 and you want a 40 percent gross margin. Price = $42 / (1 – 0.40) = $42 / 0.60 = $70.00. Check: profit is $70 – $42 = $28, and $28 / $70 = 40 percent. If you instead “added 40 percent” ($42 x 1.40), you would charge $58.80, make $16.80, and earn a margin of only 28.57 percent. SBA’s startup-cost guide uses the same margin logic at unit level, defining contribution margin as (sale price per unit – variable cost per unit) / sale price per unit (SBA).

The table below shows the price you need on a $100 cost for a range of target margins, along with the markup that is the same thing (markup = margin / (1 – margin)):

To skip the table, enter your cost and target into the free gross margin calculator; it works in both directions, from price to margin and from margin to price.

What is a good gross profit margin?

There is no single good number, because cost structures differ by industry. The most useful public reference we found is Professor Aswath Damodaran’s “Margins by Sector (US)” dataset at NYU Stern, last updated January 2026. It covers publicly traded U.S. companies, so it will not match a local shop or a one-person service business, but it shows how wide the spread is:

Source: NYU Stern, Margins by Sector (US). The page does not publish a formula for gross margin, and companies classify costs differently, so use these as a rough range, not a target. The more reliable benchmark is your own history: track your gross margin each month and by product or service line, and investigate any drop.

What counts as cost of goods sold?

COGS is the direct cost of producing or buying what you sold during the period. For a seller of products that usually means inventory purchases, freight-in and direct manufacturing labor. For a service business it means the labor, materials and subcontractors tied to specific jobs. Rent, office salaries, advertising and software subscriptions are normally overhead, which sits below gross profit. IRS Publication 334 (Tax Guide for Small Business) has chapters titled “How To Figure Cost of Goods Sold” and “Figuring Gross Profit” for businesses that sell products (IRS Publication 334). What your tax return allows may differ from how you track margin for pricing, so ask your accountant how to classify borderline costs.

Common gross margin mistakes

• Using the markup formula and calling it margin. Adding 30 percent to cost produces a 23.08 percent margin, not 30 percent ($130 price on $100 cost: $30 / $130).
• Using gross sales instead of net revenue. Returns and discounts reduce revenue; leave them in and your margin looks better than it is.
• Leaving direct labor out of COGS for a service business, which makes every job look more profitable than it is.
• Putting overhead in COGS one month and not the next. Consistency matters more than the exact definition; change categories and you cannot compare periods.
• Comparing against the wrong benchmark. A 30 percent margin may be strong in retail and weak in software.
• Confusing gross margin with net margin. Gross margin ignores overhead, interest and taxes. A business can have a healthy gross margin and still lose money.

Next step

Try your own numbers in the free gross margin calculator, then set prices with the small business pricing calculator. More pricing and profit tools are collected in our free tools section. This page is educational and not accounting or tax advice. Figures from third-party sources are accurate as of the dates shown above.

Frequently asked questions

What is the formula for gross profit margin?

Gross profit margin = (net revenue – cost of goods sold) / net revenue x 100. For example, revenue of $50,000 and COGS of $32,000 gives gross profit of $18,000 and a gross profit margin of 36 percent.

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

Gross profit is a dollar amount: revenue minus cost of goods sold. Gross profit margin is that amount expressed as a percentage of revenue. In the example above, gross profit is $18,000 and gross profit margin is 36 percent.

Is gross margin the same as markup?

No. Gross margin divides profit by the selling price, while markup divides the same profit by cost. A $100 cost sold for $142.86 is a 30 percent margin but a 42.86 percent markup.

How do I calculate selling price from a target gross margin?

Divide cost by one minus the margin. For a $42 cost and a 40 percent margin, the price is $42 / 0.60 = $70. Multiplying $42 by 1.40 would give $58.80, which is only a 28.57 percent margin.

What is a good gross profit margin for a small business?

It depends on your industry. NYU Stern’s January 2026 data for U.S. public companies shows about 25.5 percent for construction supplies, 33.2 percent for general retail and 71.7 percent for software. Compare against similar businesses and your own past results rather than a universal number.

Can gross profit margin be negative?

Yes. If cost of goods sold is higher than revenue, gross profit is negative and so is the margin. It usually means prices are too low, costs are too high, or inventory was written down.