Guide · Pricing and profit
How to calculate profit margin on each line and the whole shop.
The formula fits on one line. Using it well takes a little more: knowing which costs to include, how VAT and discounts change the answer, and why good margins on each product can still leave the shop short.
In short
To calculate profit margin, take the cost of an item away from its selling price, then express that profit as a percentage of the selling price. Gross margin uses only the cost of the goods; net margin also takes off running costs such as rent, wages and energy. Leave VAT and sales tax out of both figures.
Profit margin answers one question: of every pound or dollar a customer hands over, how much does the shop keep? It tells you whether a price is right, whether you can absorb a supplier's increase and whether a promotion is worth running.
If you only need a quick answer for one product, the profit margin calculator gives it instantly. This guide goes further. It explains the different kinds of margin, how to work them out for the whole shop and how to set prices that reach the margin you need.
The profit margin formula
- Gross profit = selling price − cost of the goods
- Gross margin % = gross profit ÷ selling price × 100
- Markup % = gross profit ÷ cost × 100
- Net profit = gross profit − running costs
- Net margin % = net profit ÷ sales × 100
A pet shop buys a bag of dog food for £12.50 and sells it for £24 on the shelf, which is £20 before VAT. Gross profit is £20 − £12.50 = £7.50. Gross margin is £7.50 ÷ £20 = 37.5%. Markup is £7.50 ÷ £12.50 = 60%. That is the whole of margin vs markup: both describe the same profit, measured against different numbers, which is why a 60% markup is only a 37.5% margin.
Take VAT or sales tax out first
For a VAT-registered UK shop, the VAT in a shelf price is not yours to keep, so it has no place in the margin. Using the £24 shelf price above would give (£24 − £12.50) ÷ £24 = 47.9%, which flatters the real 37.5% by more than ten points. Divide a standard-rated shelf price by 1.2 to get the net figure, or use the VAT calculator.
If you are not VAT-registered, you cannot reclaim the VAT your suppliers charge, so use what you paid including VAT as the cost and the full shelf price as the selling price. In the US, sales tax is added at the register, so shelf prices are usually before tax already; leave the tax out of both sides.
Gross margin vs net margin
Gross margin only looks at what the goods cost you. Net margin is what is left once the shop has paid for everything else. Here is one month for a small shop, with all figures excluding VAT:
- Sales: £24,000.
- Cost of goods sold: opening stock £18,000 + purchases £16,100 − closing stock £18,500 = £15,600.
- Gross profit: £24,000 − £15,600 = £8,400, a gross margin of 35%.
- Running costs: rent £2,200, wages £3,800, energy and other bills £1,100, a total of £7,100.
- Net profit: £8,400 − £7,100 = £1,300, a net margin of 5.4%.
Two lessons follow. First, a healthy-looking gross margin can leave a thin net margin. Second, you can work out the gross margin you need just to break even: running costs ÷ sales, here £7,100 ÷ £24,000 = 29.6%. Below that, the shop loses money however busy it is.
Cost of goods sold depends on the closing stock figure, which is why an accurate stock take matters for profit. POS2026 Loss/Profit builds the same picture automatically, using your product costs, the prices you actually sold at and the expenses you enter.
Margin by product vs whole-shop margin
The shop's overall margin is not the average of its product margins. It is weighted by how much of each you sell. Take a newsagent with three categories (figures for illustration):
- Newspapers and magazines: £5,000 sales at 20% margin = £1,000 gross profit.
- Snacks and soft drinks: £4,000 sales at 30% margin = £1,200.
- Cards and gifts: £1,000 sales at 50% margin = £500.
Total sales are £10,000 and gross profit is £2,700, so the whole-shop margin is 27%, not the 33.3% you get by averaging the three margins. Now move £1,000 of sales from newspapers to cards, perhaps with a better card display by the till. Sales stay at £10,000, but gross profit rises to £3,000 and the margin to 30%. Sales mix is often a quicker win than a price rise.
How discounts eat into margin
A discount comes straight off profit, not off cost. An item that sells for £50 with a 40% margin costs £30 and earns £20. Take 10% off and it sells for £45, still costs £30 and now earns £15. The price fell by 10%, but the profit fell by 25%, so you need four sales to earn what three earned before.
The extra sales needed to stand still are: margin ÷ (margin − discount) − 1.
- 30% margin: 10% off needs 50% more sales; 20% off needs 200% more.
- 40% margin: 10% off needs 33% more sales; 20% off needs 100% more.
- 50% margin: 10% off needs 25% more sales; 20% off needs 67% more.
Discounts given in POS Sales are saved with each transaction, so your reports show what customers really paid rather than the full price.
Pricing for a target margin
To find the price that gives a set margin, divide the cost by one minus the target: price = cost ÷ (1 − target margin). A toy shop wants a 45% margin on a jigsaw that costs £7.70. The net price is £7.70 ÷ 0.55 = £14.00. Adding VAT at 20% gives £16.80, which the shop rounds to £16.99 on the shelf. That is £14.16 net, a margin of 45.6%.
The common mistake is to add the target as a markup. £7.70 plus 45% is £11.17 net, a margin of only 31%. To convert, markup = margin ÷ (1 − margin), so a 45% margin needs an 81.8% markup. If you price from cost, the markup calculator does the conversion for you.
Keep margins accurate as costs change
A margin is only as good as the cost price behind it. If the jigsaw supplier raises the cost to £8.20 and the shelf price stays at £16.99, the margin falls from 45.6% to 42.1% without anyone noticing. Update cost prices every time an invoice changes, and recheck prices on your best sellers first.
Waste, breakages and theft cut margin as well: the goods were paid for, but no customer ever paid you for them. If your real margin keeps falling short of the margins on your price list, the shrinkage guide shows where to look.
Questions
Common questions.
Straight answers for shop owners, based on what POS2026 actually does.
What is the formula for profit margin?
Profit margin = (selling price − cost) ÷ selling price × 100. Use the selling price without VAT or sales tax, and the cost of the goods for gross margin.
What is the difference between gross and net profit margin?
Gross margin only takes off the cost of the goods sold. Net margin also takes off running costs such as rent, wages, energy and fees, so it shows what the business actually keeps.
How do I convert margin to markup?
Markup = margin ÷ (1 − margin). A 25% margin is a 33.3% markup. To go the other way, margin = markup ÷ (1 + markup), so a 60% markup is a 37.5% margin.
What is a good retail profit margin?
There is no single figure; it varies widely between trades and between product lines. A practical test is whether your gross margin is comfortably above your break-even margin, which is your running costs divided by your sales.
Should I include VAT when calculating margin?
No. If you are VAT-registered, take VAT off the selling price before you calculate. Including it overstates your margin.
Can POS2026 show my profit?
Yes. Loss/Profit combines your product costs, the prices you sold at and the expenses you enter into one profit figure, and the Report module lets you filter sales by product, customer or payment.
See your real margin without a spreadsheet.
Loss/Profit combines what you paid for the goods, what you sold them for and what the shop spent, so the real figure is there whenever you look.
