How to calculate profit margin (and price your products so you actually profit)
Profit margin is profit divided by selling price, shown as a percentage. If you sell an item for ₦10,000 and it costs you ₦6,000, your profit is ₦4,000 and your margin is 40%.
The formulas
Gross profit = selling price − cost of the item
Gross margin (%) = gross profit ÷ selling price × 100
Markup (%) = gross profit ÷ cost × 100
Net profit = total sales − all costs and expenses
Margin and markup are different. A 40% markup on a ₦6,000 item gives a price of ₦8,400 and a margin of about 28.6%, not 40%.
Worked example: a fashion seller
Item | Amount |
|---|---|
Cost of the dress | ₦12,000 |
Packaging and delivery to customer | ₦1,500 |
Total cost | ₦13,500 |
Selling price | ₦20,000 |
Gross profit | ₦6,500 |
Margin | 32.5% |
How to set a selling price
Work backwards from the margin you want: price = cost ÷ (1 − margin). For a cost of ₦6,000 and a 40% margin, the price is 6,000 ÷ 0.6 = ₦10,000.
Costs people forget
Packaging, transport and delivery
Payment and transfer charges
Rent, power, data and staff pay
Items that spoil, get damaged or are returned
Discounts and sales on credit that are never paid
Gross profit is not what you take home
Gross profit only covers the item. Net profit also subtracts running costs such as rent, salaries and marketing. A business can show healthy gross profit and still lose money overall.
Common questions
What is a good profit margin? It depends on the business. Food, fashion and resale all differ, so compare yourself over time and against similar sellers rather than against one number.
Should I include credit sales? Record them as sales when they happen, and track what is still owed separately, so you do not mistake unpaid money for cash.