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Profit margin, markup and the price to charge

Margin and markup describe the same profit from two sides: margin is profit as a share of the selling price, markup is profit as a share of the cost. Put in what a unit costs you and either the price or the margin you want, with or without 20% VAT, to see your margin, markup, profit per sale and the price for every common margin. Because the margin sets what your ads must return, you also see your break-even ROAS and the most one sale can cost to win.

  • Margin, markup and profit per sale
  • The price for every common margin, with VAT
  • Your break-even ROAS and the most a sale can cost
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Excluding VAT: what you pay for the goods, materials or labour.

Margin and markup

A 40% margin (66.7% markup): £40.00 profit on each sale at £100.00 (£120.00 with VAT).

40%Profit margin
66.7%Markup
£40.00Profit per sale
£100.00Price excluding VAT
£120.00Price with VAT (VAT £20.00)
  • Cost£60.00
  • Profit£40.00
  • VAT£20.00

In your full report

  • Break-even ROAS for your ads
  • The most a sale can cost to win
  • The price for every common margin

See your break-even ad return, the most a sale can cost, and the price ladder

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What is the difference between margin and markup?

Both describe the same profit. Margin divides it by the selling price; markup divides it by the cost. Because the price is always bigger than the cost, the margin is always the smaller number.

A £60 cost sold for £100 before VAT makes £40 of profit: a 40% margin and a 66.7% markup. Mixing the two up is the most common pricing mistake, because a markup that sounds healthy can leave a thin margin.

Going the other way, a 25% markup is a 20% margin, a 50% markup is a 33.3% margin, a 100% markup is a 50% margin and a 200% markup is a 66.7% margin.

  • Margin = (price − cost) ÷ price.
  • Markup = (price − cost) ÷ cost.
  • Markup to margin: markup ÷ (1 + markup).
  • Margin to markup: margin ÷ (1 − margin).
Margin and markup side by side
MarginMarkupPrice on a £100 cost (ex VAT)With 20% VAT
10%11.1%£111.11£133.33
20%25%£125.00£150.00
25%33.3%£133.33£160.00
30%42.9%£142.86£171.43
40%66.7%£166.67£200.00
50%100%£200.00£240.00
60%150%£250.00£300.00
70%233.3%£333.33£400.00
75%300%£400.00£480.00
80%400%£500.00£600.00
From the calculator, with percentages rounded to one decimal place. Scale the prices to your own cost: on a £50 cost, halve them.

What price do you need for a 40% margin?

Divide the cost by one minus the margin you want. For a 40% margin on a £60 cost, that is £60 ÷ 0.6 = £100 before VAT, or £120 with 20% VAT, and £40 of profit on every sale.

Adding 40% to the cost does not get you there. £60 plus 40% is £84, a margin of 28.6%, and £24 of profit instead of £40.

The ladder below is the one the calculator shows for a £60 cost. Use it to see how far each step up in margin moves the price, and whether your customers would pay it.

The price for each margin on a £60 cost
MarginMarkupPrice ex VATPrice with 20% VATProfit per sale
20%25%£75.00£90.00£15.00
30%42.9%£85.71£102.86£25.71
40%66.7%£100.00£120.00£40.00
50%100%£120.00£144.00£60.00
60%150%£150.00£180.00£90.00
70%233.3%£200.00£240.00£140.00
From the calculator for a £60 cost excluding VAT, rounded to the penny.

How do you calculate profit margin with VAT?

Take the VAT out first. VAT is collected for HMRC, so it is never part of your revenue or your margin. Divide a price that includes 20% VAT by 1.2: £120 becomes £100, and the £20 of VAT is one sixth of the total.

Forgetting this makes a margin look far better than it is. On a £60 cost, a £90 price including VAT is a 20% margin, not the 33.3% you get by treating the whole £90 as yours.

If you are not VAT registered, you cannot reclaim the VAT your suppliers charge, so it is part of your cost. A £60 cost that carries £12 of VAT is really £72, and a £100 price then gives a 28% margin rather than 40%. The calculator uses the 20% standard rate; goods at the 5% reduced rate or the zero rate need that rate taken off instead.

How VAT changes the margin on a £60 cost (ex VAT)
Price the customer paysTreated asRevenue to youProfitMargin
£120Including 20% VAT£100.00£40.0040%
£120Wrongly, all revenue£120.00£60.0050%
£90Including 20% VAT£75.00£15.0020%
£90Wrongly, all revenue£90.00£30.0033.3%
£100Including 20% VAT£83.33£23.3328%
£144Including 20% VAT£120.00£60.0050%
From the calculator for a VAT-registered business at the 20% standard rate.

What is your break-even ROAS at each profit margin?

Your margin sets the line your advertising has to clear. Break-even ROAS is one divided by the margin: at 40%, each £1 of ads must bring back £2.50 of sales before VAT just to pay for itself out of gross profit.

The profit on one sale is also the most that sale can cost to win. At a £100 price and a 40% margin, a sale can cost up to £40 in ads before it loses money; at a 20% margin, only £20.

Check how your ad account counts sales. If the sales value it reports includes VAT, the line moves up by a fifth: 3:1 rather than 2.5:1 at a 40% margin. And if customers buy again, judge the first sale against their lifetime value, not the first order alone.

Break-even ROAS and the most a sale can cost to win, by margin
Gross marginBreak-even ROAS (sales ex VAT)If your ad account counts sales with VATMost a £100 sale (ex VAT) can cost to win
10%10:112:1£10
20%5:16:1£20
25%4:14.8:1£25
30%3.33:14:1£30
40%2.5:13:1£40
50%2:12.4:1£50
60%1.67:12:1£60
70%1.43:11.71:1£70
80%1.25:11.5:1£80
From the calculator. The third column is the same break-even worked out on sales that include 20% VAT. Profit here is gross profit; fees, wages and rent still have to come out of it.

How do discounts and hidden costs change your margin?

A discount comes straight out of your profit, not out of the price as a whole. On a £60 cost and a £100 price, 20% off halves the profit from £40 to £20, so you need twice as many sales to earn the same.

Costs paid on every sale belong in the unit cost too. Leave them out and the margin looks better than the money in the bank.

The same applies to a service. A job that costs £300 in materials and labour and is priced at £500 before VAT has a 40% margin and £200 of profit; add £30 of fees and travel to the cost, and the margin falls to 34%.

  • Card and payment fees on every order.
  • Marketplace or platform fees.
  • Packaging, and delivery you do not charge for.
  • Returns, refunds and damaged stock.
  • For a service, the hours of the people who do the work.
Discounts on a £60 cost and a £100 price (ex VAT)
DiscountPrice ex VATProfit per saleMarginSales needed to earn the same profit
None£100.00£40.0040%1×
10% off£90.00£30.0033.3%1.33×
20% off£80.00£20.0025%2×
30% off£70.00£10.0014.3%4×
Profit and margin from the calculator; the last column is £40 divided by the profit per sale.

How the tool works

  1. Put in what one unit or job costs you, excluding VAT.
  2. Type your selling price, or the margin or markup you want.
  3. Say whether the price includes VAT and whether you charge VAT.
  4. See margin, markup, profit per sale, the price ladder and what your ads must return.

How Scale Oxford helps

Want ads that sell at a profit?

We start from your margins, product range by product range, and set what each sale can cost to win. Then we build the campaigns, the shop pages and the tracking so you see profit after ad spend, not just revenue.

  1. We work out a break-even and target ROAS for each product range from your real margins.
  2. We set up tracking so your ad accounts count sales the same way you work out margin.
  3. We report profit after ad spend every month, alongside sales and ROAS.
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Questions people ask

How do you calculate profit margin?

Take the cost away from the selling price, divide by the selling price and multiply by 100. A product that costs £60 and sells for £100 (before VAT) has a profit of £40 and a margin of 40%.

What is the difference between margin and markup?

Margin is profit divided by the selling price; markup is profit divided by the cost. The same £40 profit on a £60 cost and £100 price is a 40% margin but a 66.7% markup, so a 40% markup is not a 40% margin.

Should profit margin include VAT?

No. VAT is collected for HMRC, not earned, so take it off before working out margin. A £120 price including 20% VAT is £100 of revenue to you.

How do I price for a 50% margin?

Divide the cost by one minus the margin: £60 ÷ (1 − 0.5) = £120 before VAT, or £144 with 20% VAT. Doubling the cost is a 100% markup and a 50% margin.

How do I convert markup to margin?

Divide the markup by one plus the markup. A 50% markup is 0.5 ÷ 1.5, a 33.3% margin, and a 100% markup is a 50% margin. To go the other way, divide the margin by one minus the margin: a 40% margin is a 66.7% markup.

How do I work out the VAT in a price that includes it?

Divide the price by 1.2 to get the price before VAT; the VAT is the difference. At the 20% standard rate, VAT is one sixth of a price that includes it, so £120 holds £20 of VAT. Taking 20% off £120 gives £96, which is wrong.

What is break-even ROAS?

It is the return on ad spend at which your ads pay for themselves out of gross profit and no more. Divide one by your margin: at 40% it is 2.5:1, so £100 of ads must bring in £250 of sales before VAT. Above the line the ads make money; below it they cost more than they earn.

Should delivery, packaging and payment fees go in my cost?

Yes, if you pay them on every sale. Card and marketplace fees, packaging, delivery you do not charge for and an allowance for returns all come out of each sale. Overheads such as rent and salaries do not belong in the unit cost; they come out of gross profit.

What is the difference between gross margin and net margin?

Gross margin is what is left of a sale after the cost of the goods or the work, and it is what this calculator works out. Net margin is what is left after everything else as well: wages, rent, software, marketing and tax. A healthy gross margin can still leave a thin net margin.

Is it better to raise prices or cut costs?

Each pound either way adds a pound of profit, so test small price rises before squeezing suppliers. On a £60 cost and a £100 price, raising the price to £105 lifts the profit from £40 to £45, an eighth more, and the margin from 40% to 42.9%. Watch whether sales fall by more than the extra profit covers.

Can a profit margin be more than 100%?

No. Margin is profit as a share of the price, so it could only reach 100% if the product cost nothing. Markup has no ceiling: a £20 cost sold at £100 is an 80% margin and a 400% markup.

I am not VAT registered. How do I work out my margin?

Put in your costs including any VAT your suppliers charge, because you cannot reclaim it, and leave the VAT registered box unticked. A £60 cost that carries £12 of VAT is really £72, so a £100 price gives a 28% margin, not 40%. You must register once your VAT-taxable turnover passes the threshold, which has been £90,000 over 12 months since April 2024.

What profit margin do I need for paid ads to work?

There is no fixed line, but the thinner the margin, the harder ads have to work. Below a 30% gross margin each £1 of ads must bring back more than £3.33 of sales before VAT just to break even, which is hard for a new campaign. Products with higher margins, or customers who buy again, leave more room to pay for each sale.

How do I work out cost from the selling price and margin?

Multiply the price before VAT by one minus the margin. A £100 price at a 40% margin means the product can cost up to £60; at a 50% margin, £50. It is a quick way to see what you can afford to pay a supplier for a price customers already accept.

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