Business · 6 min read · Last updated September 2026
Worked example: revenue $50,000, goods cost $30,000, operating costs $12,000. Gross margin = 20,000 ÷ 50,000 = 40%. Net margin = 8,000 ÷ 50,000 = 16%. Both describe the same business — they answer different questions.
To earn a 40% margin on a $30,000 cost, price = cost ÷ (1 − 0.40) = $50,000. Someone who instead applies "40% markup" prices at 30,000 × 1.40 = $42,000 and unknowingly earns only a 28.6% margin. On thin-margin retail this single confusion is the difference between a profitable and a losing price list.
| Target margin | Equal markup |
|---|---|
| 20% | 25.0% |
| 30% | 42.9% |
| 40% | 66.7% |
| 50% | 100% |
Gross margin shows whether the product itself is priced sanely; net margin shows whether the business survives payroll, rent and software. A 40% gross / 16% net business is normal. Compare against your own industry's typical band rather than a universal number — software, groceries and construction live at completely different margin levels.
Divide profit by revenue and multiply by 100. Gross margin uses revenue minus cost of goods; net margin subtracts operating costs too. Example: $50,000 revenue, $30,000 COGS → 40% gross margin.
Margin is profit divided by price; markup is profit divided by cost. A 40% margin equals a 66.7% markup. Setting prices by markup when you meant margin systematically underprices your products.
Price = cost ÷ (1 − target margin). For a 40% margin on $30,000 of cost: 30,000 ÷ 0.6 = $50,000. Check the result with the margin formula — it should return exactly your target.
It depends entirely on industry. Compare against sector norms: margins that are healthy in software would be impossible in grocery retail and vice versa. Trend over time matters more than any absolute number.