What profit margin actually tells you
Profit margin is the share of each sale you keep after paying for the thing you sold. Markup is how much you added on top of your cost. People mix them up constantly, and pricing on the wrong one is how a 50% markup turns into a 33% margin without anyone noticing.
A worked example
A product costs you 1,200 to make and sells for 1,800. You've added 600, which is a 50% markup on cost. But 600 is only a third of the 1,800 selling price, so your margin is 33.3%. If a supplier asks for "a 40% margin" and you give them a 40% markup, you've underpriced by about 11 points.
Common questions
What's a good profit margin?
It depends entirely on the industry. Grocery runs on low single digits, software often above 70%. Compare against businesses like yours, not against a universal number.
Is this gross or net margin?
Gross. It only accounts for the direct cost of the item. Rent, salaries and tax come off later to give you net margin.
How do I price for a target margin?
Divide your cost by (1 − target margin). For a 40% margin on a 1,200 cost: 1,200 ÷ 0.6 = 2,000.