Gross margin = (selling price − cost of goods) ÷ selling price × 100How to use this calculator
- Enter the cost of goods for one item, using a consistent accounting definition.
- Enter its net selling price, or choose target-price mode and enter a gross margin below 100%.
- Add other variable costs separately, then compare gross margin, markup and contribution before ads.
Worked example
An illustrative item sells for $100 and has $60 in cost of goods. Gross profit is $40, gross margin is 40% and markup on cost is 66.67%. With another $10 in variable costs, $30 remains before advertising: a 30% contribution margin. Covering those entered costs and ad spend requires about 3.333× ROAS.
Margin and markup use different denominators
Margin divides gross profit by the selling price; markup divides it by cost. Adding 40% to a $60 cost gives an $84 price and a 28.57% gross margin. To obtain a 40% gross margin on that same cost, the price must be $100. The mode selector keeps these two questions separate.
Gross profit is not net profit
The first calculation subtracts only cost of goods. The second subtracts your additional variable costs to show contribution before ads. It does not call that figure net profit: rent, fixed payroll, financing, tax and other unentered expenses may remain. Avoid entering an expense twice.
Use contribution to plan an ad-spend ceiling
The break-even ROAS shown here uses the contribution available before advertising. It covers the entered variable costs and the ad bill at that point, without reserving an operating profit. If contribution is zero or negative, no positive acquisition budget remains under those assumptions. Use the separate ROAS calculator to compare actual revenue and spend.
Reference: Shopify: gross margin versus markup.
Common questions
How do I calculate profit margin?
Subtract your defined costs from revenue, divide by revenue and multiply by 100. This tool labels its first result as gross margin because that calculation subtracts COGS only. Additional variable costs appear separately in the contribution result.
How do I find a selling price for a target margin?
Divide COGS by one minus the target gross margin expressed as a decimal. With $60 COGS and a 40% target, $60 ÷ 0.6 gives $100. Target-price mode needs a positive cost and a margin from zero to below 100%.
What happens if cost is zero or exceeds the selling price?
With zero COGS and a positive price, gross margin is 100% but markup is undefined. Costs above revenue produce a negative margin, which this tool retains. A zero selling price is rejected because margin would require division by zero.
Should I include shipping, fees or sales tax?
Use a consistent net sales figure, excluding collected sales tax. Put costs in the appropriate COGS or additional-variable-cost field according to your policy, counting each once. Exclude ad spend from those fields when using the displayed break-even ROAS.