Gross margin calculator

How to calculate gross margin

Take the cost of sales away from the selling price, divide what's left by the selling price, and multiply by 100:

Gross margin % = (selling price − cost of sales) ÷ selling price × 100

Turned round, the same relationship gives the price for a margin you've chosen:

Price = cost ÷ (1 − target margin), with the margin as a decimal, so 40% is 0.4.

It works for a single item, a job or a whole year. For a year, use revenue and the cost of sales line from your P&L. Cost of sales means the direct costs of what you sold: materials, the wages of the people who make or deliver it, subcontractors and carriage. Office salaries, rent and marketing stay out, because they're overheads.

Worked example

A fictional 30-person sign maker is quoting for a shop-front sign. Materials, two days of fitting and access equipment come to £1,560. Its usual price for a sign that size is £2,400, which leaves £840 of gross profit: a 35% gross margin.

The directors want 40% on installation work. Dividing £1,560 by 0.6 gives £2,600, the answer the second calculator shows, and at that price the job makes £1,040.

Then the customer asks for 10% off the original £2,400. That's £2,160, and the cost hasn't moved, so gross profit falls from £840 to £600 and the margin to 27.8%. Taking a tenth off the price has removed more than a quarter of the profit. Put £2,160 and £1,560 into the first calculator to see it.

Setting a price from a target margin

The most common slip is adding the margin to the cost. On a £60 cost, adding 40% gives £84, but £24 of profit on an £84 price is a 28.6% margin. Margin is measured against the price, so you have to divide instead: £60 ÷ 0.6 = £100, and £40 on £100 is the 40% you wanted.

The gap widens as targets rise. A 50% margin means charging twice the cost, and 75% means four times. A 100% margin is only possible if the item costs nothing, so the calculator leaves the price blank at 100% or above.

Reading margin across a product range

You can't simply average margins. Say one product line sells £100,000 at a 50% margin and another sells £300,000 at 20%. The average of the two percentages is 35%, but the company made £50,000 + £60,000 = £110,000 of gross profit on £400,000 of sales, which is 27.5%. Add up the gross profit and the revenue first, then divide.

It's also why a company's overall margin can fall while every product keeps its own: if the low-margin line grows fastest, the mix pulls the total down. Compare your margin with the same range last year and with what you quoted, and check the mix before blaming prices or suppliers. The margin you actually need comes from your overheads, which a break-even calculation makes clear.

Common mistakes

• Adding the margin to the cost instead of dividing by one minus the margin.
• Prices that include VAT. A VAT-registered business pays that VAT over to HMRC, so it isn't part of the sale, and leaving it in inflates the margin.
• Leaving direct labour out of cost of sales. If people are paid to make or fit the product, their time is part of its cost.
• Never checking actual costs. A job that overruns by a day loses margin the quote never showed.
• Averaging percentages across products, customers or months.