How to Calculate Profit Margin (and Why Some Get It Wrong)

If you’re running a product-based business—or thinking about starting one—profit margin is the single most important number you need to understand.

It’s not your logo. It’s not your website platform. It’s not your email tool.

It’s how much money you actually make every time you sell something.

Most businesses fail because they spend more than they bring in. And often, that starts with a product that never had enough margin to begin with.

If you're a visual learner, just watch this video. If you prefer to read, keep scrolling.

What Is Profit Margin?

At its core, profit margin is your profit divided by your revenue. But depending on the level of detail, it can get more nuanced. Here’s the breakdown:

  • Gross Margin = (Revenue – Cost of Goods Sold) ÷ Revenue

  • Operating Margin = (Gross Profit – Operating Expenses) ÷ Revenue

  • Net Margin = Net Profit ÷ Revenue

For product businesses, gross margin is usually the focus—especially if you’re selling physical goods online.

Real-World Example: Apple Pie Moonshine Spice Mix

To show you how this works, I’ll walk through a real example from my business. I’ve been selling physical products online for 15+ years, and I’ve used the same spreadsheet to calculate the margin on every single product I’ve ever sold.

sample product - spice mix

Let’s take a product we’ve sold for years: a tin of spices used to make apple pie moonshine. The ingredients are simple: cinnamon sticks, cinnamon chunks, cloves, nutmeg, etc. But calculating the profit margin is a little more involved.

Here’s how I break it down:

Step 1: Know Your Costs

For each unit, I list out:

  • Ingredients (down to the ounce)

  • Packaging (tin, labels, shrink bands)

  • Labor (assembly time × hourly wage)

These are the basic inputs that go into making this item and would fall under the category of the Cost of Goods Sold, or COGS. They aren't all of the expenses involved in getting this product to a customer (we'll get to the rest later). But these are the basics. It's helpful to calculate these costs separately because it gives you a clear baseline for what it actually takes to make your product before layering on anything else. This way, you can quickly see whether a product is even viable—before factoring in things like fulfillment, shipping, credit card fees, or marketing costs. It also helps you spot opportunities to improve your margins by dialing in raw materials or production efficiency.

Here's what the COGS looks like for this particular product:

This is a screenshot from our SOLID Margin Calculator, and it shows us that the materials cost for this particular product amounts to $3.98. However, we'll need to add labor too. This is done by multiplying the number of hours needed to create a single unit by the hourly rate of the employee doing the work.

When combined, these numbers provide the total cost of goods sold figure for this particular product, which is $4.73. Once your COGS are dialed in, you can move on to the rest of the equation: what it costs to sell and ship the product—and what kind of margin you’re actually left with at the end.

Next, we'll calculate the cost for:

  • Shipping materials (mailer, tape, label)

  • Fulfillment labor (pull, pack, ship)

  • Shipping cost to customer

  • Credit card fees

  • Tariffs, if imported

  • Financing fees, if I bought inventory on credit

For this particular product, the additional costs are as follows:

As you cans, the additional costs amounted to $7.08 - almost double the base cost of the item. That's why it's critically important to include every expense that goes into making a product and shipping it to the customer. When you put it all together, you start to see the true cost of a product—far beyond just raw materials. In this case, the total cost is $10.81.

Step 2: Calculate Your Selling Price

Let’s say this spice mix costs $10.81 to make, package, and ship. If I sell it for $15, I only make $3.44 per unit—and once credit card processing fees are included. This results in a gross profit margin of roughly 23%, which is NOT GOOD for a small business.

23% likely won't not be enough to stay profitable once overhead costs like rent, insurance, marketing and salaries for additional personnel are factored in. In fact, it most certainly is not if the sales volume is relatively low.

Let's test some additional price points by adjusting the calculator:

  • $18 = 35% margin (getting better)

  • $19.99 = 41% margin (my minimum target)

  • $24 = 50% margin (ideal)

I like to shoot for at least 40% gross margin when selling direct-to-consumer. If I ever plan to wholesale, I’d need an even higher retail price.

Step 3: Consider Discounts and Promotions

Here’s where a lot of sellers trip up. Let’s say you offer a 10% discount. Your $19.99 product just dropped below that 40% threshold—and you might be losing money without realizing it.

If you plan to run discounts often, you have to bake that into your pricing strategy.

Why This Matters

I built my business around knowing these numbers cold. If you don’t understand your margins, you risk growing something that isn’t actually profitable. And that’s a fast track to burnout—or worse, shutting down.

Want the Spreadsheet?

The tool I use is called the Solid Strat Margin Calculator. It’s a Google Sheet I’ve used for over a decade, and it’s available for download at here.

It’s fully editable, has built-in formulas, and comes with instructions. Whether you’re just getting started or optimizing an existing business, it’ll help you price with confidence.

We’ll also be adding more tools soon for product businesses, creators, and content marketers—so keep an eye on the site if that’s you.

Bottom line:

If you’re serious about turning a profit, start here. Know your costs, build your margins, and price accordingly.

Got questions? Drop them in the comments or reach out.

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