Gross margin calculator

Worked example

A product sells for 1,000 before sales tax and costs 600:

Item	Working	Result
Gross profit	1,000 − 600	400
Gross margin	400 ÷ 1,000	40%
Markup	400 ÷ 600	66.7%
Break-even ROAS	1 ÷ 40%	2.50

The same product has a 40% margin and a 66.7% markup. Both are correct; the denominator differs. Margin divides by the price, markup by the cost.

Using gross margin to decide on ad spend

Gross margin caps what advertising can cost. The product above keeps 400 of every 1,000 sold, so once ad spend passes 40% of revenue it loses money. As a ROAS, that is 1 ÷ 40% = 2.50.

Gross margin	Break-even ROAS on margin alone
60%	1.67
50%	2.00
40%	2.50
30%	3.33
20%	5.00

The table leaves out shipping, payment fees and returns, so the real threshold is higher still. In practice:

• Before raising a budget, check that reported ROAS clears the threshold once shipping, fees and returns are in. The break-even ROAS calculator adds them.
• Below 30% margin the threshold is above 3.33. Changing price, cost or the offer (add-ons, bundles) usually moves more than changing the ads.
• Selling several products from one account, use the weighted average margin, not the margin of your best product.

Common mistakes

• Using a tax-inclusive price. Sales tax is not revenue. In Taiwan the general business tax is 5%, so 1,050 including tax is 1,000 of revenue. A tax-inclusive denominator overstates the margin.
• Treating markup as margin. A cost of 600 marked up 50% sells for 900: a 33.3% margin, not 50%. Using the markup for an ad threshold makes you think you can afford more.
• Counting only the purchase price. Cost here is the direct cost of the item sold: purchase or manufacture, packaging, inbound freight. Per-order shipping and payment fees come off in the break-even ROAS step.
• Treating gross margin as the ad budget. Gross profit has to pay for ads, shipping, salaries and rent. Spend all of it on ads and there is no profit. Decide what to keep in the max CPA calculator.

FAQ

How do you calculate gross margin?

(Price − cost) ÷ price × 100%, with both figures before sales tax. A price of 1,000 and a cost of 600 give a 40% gross margin.

What is the difference between margin and markup?

The denominator. Margin divides gross profit by the price, markup divides it by the cost. Selling for 1,000 something that costs 600 is a 40% margin and a 66.7% markup. "Cost plus 30%" is a markup.

What gross margin do I need to advertise?

There is no single number; it depends on your shipping, fees and returns. Start with 1 ÷ margin for the threshold on margin alone, then add the other costs in the break-even ROAS calculator. If that threshold is above the ROAS your ads deliver now, fix price or cost first.