Profit margin shows how much of a sale remains as profit. For small business pricing, the most useful number is usually net margin, because it includes direct costs, overhead, payment fees, and other operating costs.
A quote can look healthy at the gross margin level and still be weak after rent, insurance, software, bookkeeping, admin time, and payment fees. That is why the calculator asks for overhead and fees before it estimates a target price.
Profit Margin Formulas
The basic formula is profit margin = profit / revenue x 100. The key is choosing the right profit number for the decision.
| Metric | Formula | Best use |
|---|---|---|
| Gross margin | (Revenue - direct costs) / revenue | Checking product or job-level cost efficiency |
| Net margin | Net profit after direct costs, overhead, and fees / revenue | Setting prices and deciding whether the business model works |
| Markup | (Price - cost) / cost | Cost-based quoting, but not the same as margin |
| Contribution margin | Revenue after variable costs / revenue | Estimating break-even volume before fixed overhead |
Example
If a $500 job has $220 in direct labor and materials, the gross profit is $280 and the gross margin is 56%. If the same job also carries $90 in overhead and $20 in payment fees, net profit falls to $170 and net margin becomes 34%.
That difference matters. If you price only from gross margin, you may think the quote is generous. If you price from net margin, you can see whether the job still supports the business after fixed costs and fees.
Use net margin for pricing decisions. Gross margin is useful, but it can hide the fixed costs that decide whether the business actually works.
Quick FAQ
Is a 20% profit margin good?
It depends on the business, risk, workload, and volume. A 20% net margin can be strong for a repeatable service, but weak if jobs are irregular, risky, or require heavy admin and selling time.
Why is markup different from margin?
Markup compares profit to cost. Margin compares profit to selling price. A 50% markup is not a 50% margin; it produces a 33.3% margin.
Which margin should I use in the calculator?
Use your target net margin: the profit share you want after direct costs, overhead, and payment fees.