Your profit margin is how much of every pound you charge you actually keep. There are two versions and you need both. Gross margin is what is left after you have paid for the thing you sold. Net margin is what is left after everything else has been paid too. Margin matters more than the price on the label, because a business with big sales and a thin margin can work very hard for almost nothing.
At a glance
| Feature | Detail |
|---|---|
| Gross margin | What is left after paying for the thing you sold |
| Net margin | What is left after everything, including the bills that arrive anyway |
| Margin vs markup | Margin is measured against your price; markup against your cost |
| Why it matters | Sales show how busy you are; margin shows whether it was worth it |
| Discounting | Taking 10% off the price can remove about a third of the profit |
| The right order | Work out the margin you need, then set the price |
Gross margin — what is left after you have paid for the thing you sold
Take Priya, who makes scented candles in a small unit in Leicester and sells them online. Each candle sells for £24.
Before she has paid a single bill, that candle has already cost her money. The wax, wick, fragrance oil, jar and lid come to £6.50. The box and packing are £1.20. Postage is £3.80. The card fee on a £24 order is about 80p. And a few candles a month arrive broken or come back, averaging about 50p a candle. That is £12.80 gone out of the £24.
So £11.20 of every £24 is left, which is 47% of the price. That is her gross margin.
Those are only the costs that happened because she made and sent that candle — the rent and the insurance come later. And she remembered the postage, the card fee and the breakages, which are exactly the three things people forget. Leave those out and the margin looks like 64%: a comfortable, completely wrong number to plan a business on.
Priya sells about 500 candles a month. That is £12,000 a month of sales — the word HMRC uses for sales is turnover. Making and sending 500 candles costs 500 times £12.80, or £6,400. So her gross profit is £5,600 a month.
Net margin — what is left after everything
Gross profit is not yours yet. Out of that £5,600 come all the costs Priya pays whether or not she sells a single candle.
Unit rent and bills are £750 a month. Insurance is £45. Website, email and design software are £120. Her accountant is £90. Advertising is £900. Phone is £30. Bank charges and odds and ends are £65. That is £2,000 a month that turns up regardless.
£5,600 of gross profit, minus £2,000 of bills, leaves £3,600 a month. Against £12,000 of sales, that is a net margin of 30%.
One honest wrinkle, because it changes the number a lot. Priya is a sole trader, so that £3,600 is her pay and it is also the profit she is taxed on. If she ran the same business as a limited company and paid herself a £2,500 salary, the salary would be one of the costs, and the net margin would be £1,100 of £12,000 — about 9%. Whenever anyone quotes you a net margin, ask whether the owner's pay is inside it.
Sales at the top, costs underneath, and the number at the bottom is yours: that is your profit plan, and the two margins are where you stop and look on the way down it.
Margin and markup are not the same number
Margin is measured against your price. Markup is measured against your cost. Priya's candle costs £12.80 and sells for £24. The £11.20 she keeps is 47% of the price — a 47% margin. But it is 87% of the cost — an 87% markup. Same candle, same £11.20, two numbers that look nothing like each other.
Here is where it bites. Suppose Priya wants a 40% margin and gets there by adding 40% to her cost. £12.80 plus 40% is £17.92. But £17.92 minus £12.80 is £5.12, and £5.12 is only 29% of £17.92. She has given herself a 29% margin while believing she has 40%.
To actually get 40% she divides rather than adds: £12.80 divided by 0.6 is £21.33. The gap between £17.92 and £21.33 is £3.41 a candle, and across 500 candles a month that mistake is worth over £1,700 a month. Whenever a supplier or a trade forum quotes a percentage, ask which one they mean.
Why margin matters more than the price on the label
A price rise does not get shared out. It goes straight into the margin, whole.
If Priya puts her candle up 5%, from £24 to £25.20, nothing about her costs changes. So the £11.20 she keeps becomes £12.40. Across 500 candles that is £6,200 of gross profit instead of £5,600, and after her £2,000 of bills she has £4,200 a month instead of £3,600.
A 5% change to the price made a 17% change to her profit. That works just as hard in the other direction.
Big sales, thin margin: the trap
New founders quote their sales figure because it is the biggest number they have. It is also the least useful.
Compare Priya with someone buying finished goods in and selling them on. He does £40,000 a month of sales — more than three times what she does. But he buys at £22 and sells at £25, so he keeps £3 in every £25. That is a 12% gross margin, and on £40,000 it is £4,800 of gross profit a month. His bills are bigger too — a larger unit, a part-time packer, more advertising — so call it £4,000. He is left with £800.
Priya, on a third of his sales, is left with £3,600. He also has more stock money tied up and less room to be wrong: at a 12% margin, sales only have to drop by an eighth before the bills stop being covered. Growth is only worth having if the margin comes with it.
What a discount really costs
Priya runs a sale: 10% off everything. The candle goes from £24 to £21.60. She sells the same 500.
Her sales drop from £12,000 to £10,800. But her costs do not drop at all — the wax, jar, postage and card fee still add up to £12.80 a candle, so 500 candles still cost £6,400. Gross profit falls from £5,600 to £4,400, her £2,000 of bills are unchanged, and the profit falls from £3,600 to £2,400.
She gave away a tenth of the price and lost a third of the profit. And to earn that £1,200 back at the sale price she would have to sell 637 candles instead of 500 — 27% more work, wax and parcels for the money she had before the sale started.
If you are going to discount, discount something specific for a reason: clearing old stock, a first order, a bulk quantity that genuinely costs less to fulfil. Never discount across the board because sales were quiet.
Work out your pricing with Plan, free. Plan does the pricing maths with you — costs, margin and what to charge — one short question at a time, in your browser.
What margins look like in different kinds of business
There is no single right margin, and any figure claiming to be one is worth ignoring. But the shape is predictable.
Service businesses — a plumber, a bookkeeper, a designer — have a high gross margin, because very little is bought in. Most of what a customer pays is your time. The catch is that time does not scale: you cannot sell more than you have hours. So the number to get right there is your rate, and our hourly rate guide does that sum in full.
Making and selling a product sits in the middle. There are real materials, packing and delivery in every sale, so gross margin is controllable — a cheaper jar or a better postage deal genuinely moves it. This is where forgotten costs do the most damage.
Buying to resell — shops, ecommerce, wholesale — runs on thin gross margins and lives or dies on volume and stock. You cannot fix a bad buying price with hard work.
For actual numbers, use your own trade's figures rather than a general average. Your accountant sees businesses like yours and is usually the fastest honest answer.
Figures correct as of September 2026. Tax thresholds, fees and rates change; check the linked GOV.UK pages before acting. Prices and costs shown are indicative and vary by area and by what's included.
What is Plan?
Plan is a free business operating system for people starting or newly running a UK business. It walks you, one simple step at a time, from your elevator pitch through brand, product and pricing, to a complete business plan — then uses everything it now knows about the business to help with the basics: logo and brand, marketing, a website, a bank account, funding, insurance, company registration. You can use as much or as little as you want.
Tell Plan what a sale costs you and what you charge, and it works out both margins, then builds your Year 1 profit plan month by month. You can export it as a spreadsheet for your accountant.
Frequently asked questions
How do you calculate profit margin? Take your selling price, subtract what that sale cost you, and divide the answer by the price. A candle sold for £24 that cost £12.80 in materials, packing, postage and card fees leaves £11.20, and £11.20 divided by £24 is 47%.
What is the difference between gross margin and net margin? Gross margin is what is left after you have paid for the thing you sold — materials, packing, delivery, card fees. Net margin is what is left after everything, including the costs you pay whether you sell anything or not.
What is the difference between margin and markup? Margin is measured against your price, markup against your cost. A £12.80 item sold at £24 has a 47% margin and an 87% markup. For a 40% margin, divide your cost by 0.6 rather than adding 40% to it.
Is a 20% profit margin good? It depends on the trade and on whether your own pay is inside the number. The only test that matters is yours: margin per sale, times realistic monthly sales, minus the bills that arrive anyway, must pay you properly.
Why does a 10% discount cost so much profit? Because your costs do not fall with your price. If you keep 30p of every pound and give away 10p of it, you have given away a third of what you were keeping.
Two ways to do this
Do the maths with Plan, free. Put in what a sale costs you and what you charge, and Plan shows both margins and what different prices would do. It runs in your browser — nothing to download.
Or do it with a notepad tonight. You need one product, an honest list of what that sale costs you, and last month's bank statement for the bills. If the answer is uncomfortable, our guide to raising your prices covers what to do about it.