Enter revenue and cost to get gross margin, markup and profit, and see why margin and markup are not the same number.
This confusion costs real money. A product costing $72 sold at $120 carries a 40 percent margin and a 66.7 percent markup. Apply a 40 percent markup to $72 and you price at $100.80 – a 28.6 percent margin, twelve points below what you intended.
The relationship: markup = margin ÷ (1 − margin). To hit a 50 percent margin you need a 100 percent markup. To hit 60 percent, a 150 percent markup.
| Target margin | Required markup |
|---|---|
| 20% | 25% |
| 30% | 42.9% |
| 40% | 66.7% |
| 50% | 100% |
| 60% | 150% |
| 70% | 233% |
Gross margin answers one question: what is left after the cost of the thing you sold. Every other margin answers a narrower version of the same question, further down the income statement, and each one has its own page here rather than a paragraph on this one.
Operating margin subtracts the cost of running the business, including the entire advertising budget. It is the number that decides how much spend the business can survive, and the operating margin calculator works it out with break-even revenue.
Net margin subtracts interest and tax as well, and is what the bank balance is supposed to agree with. The net profit calculator takes it line by line.
Contribution margin goes the other way, isolating what a single additional unit adds after variable cost. That is the figure ad targets are actually built on, and the contribution margin calculator pairs it with break-even units.
The one thing worth carrying away from this page: the deeper down the statement you go, the less useful the number becomes for deciding what to bid, and the more useful it becomes for deciding whether to keep trading at all.
Because every meaningful ad target derives from margin.
Because every meaningful ad target derives from margin. Break-even ROAS is one divided by contribution margin. Maximum CPA is order value multiplied by contribution margin. Get the margin wrong by ten points and every bid target downstream is wrong.
For advertising decisions, use contribution margin rather than gross margin – subtract shipping, payment processing, packaging and a returns allowance as well as cost of goods. That is the number that decides what a customer is worth to buy.