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To calculate a selling price that meets a target gross margin, divide the unit cost by one minus the margin expressed as a decimal. For example, a $100 cost and a 40% target gross margin give a price of $100 ÷ (1 − 0.40) = $166.67. The $66.67 difference between price and cost is 40% of the selling price.
The selling-price formula for a target margin
Selling price = unit cost ÷ (1 − target gross margin)
Convert the percentage to a decimal before using it: 40% becomes 0.40. Subtract that from 1, then divide the cost by the result. This is the standard gross-margin calculation described by Massachusetts guidance on pricing products and Shopify’s product-pricing guide.
- Write the target margin as a decimal.
- Subtract it from 1 to find the share of the price that covers cost.
- Divide unit cost by that share.
- Check the result by subtracting cost from price, then dividing the difference by price.
For a 40% target, the cost share is 1 − 0.40 = 0.60. A $100 unit cost divided by 0.60 gives $166.67. The gross profit before other expenses is $66.67, and $66.67 ÷ $166.67 is approximately 40%.
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Margin and markup use different denominators
Gross margin measures the difference between selling price and cost as a share of the selling price. Markup measures that same difference as a share of cost. Because the denominators differ, the percentages are not interchangeable.
| Measure | Formula | Example with $1 cost and $1.50 price |
|---|---|---|
| Gross margin | (Selling price − cost) ÷ selling price | $0.50 ÷ $1.50 = 33.3% |
| Markup | (Selling price − cost) ÷ cost | $0.50 ÷ $1.00 = 50% |
The University of Maine Cooperative Extension uses this $1.00-cost, $1.50-price example to illustrate the distinction in its pricing guidance. Massachusetts’ guidance also explains why margin is lower than markup when both describe the same dollar difference.
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If you intend to apply a markup percentage instead of targeting a margin, use selling price = cost × (1 + markup). For example, a 50% markup on $1.00 gives a $1.50 price. Do not put a margin percentage into the markup formula.
Worked calculations
| Unit cost | Target gross margin | Calculation | Calculated price |
|---|---|---|---|
| $100 | 40% | $100 ÷ (1 − 0.40) | $166.67 |
| $14.28 | 20% | $14.28 ÷ (1 − 0.20) | $17.85 |
The second calculation matches an example in Shopify’s pricing guide. These examples show how the arithmetic works; they are not recommendations for what a business should charge or claims about typical margins.
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Decide what belongs in unit cost
The formula only works as intended if “cost” is defined. Gross margin commonly compares a selling price with direct product cost or cost of goods sold. The amount left after those costs must still help cover overhead and contribute to profit. Massachusetts guidance lists expenses such as facilities, insurance, interest, utilities, office and sales staff, and marketing as costs that can affect net margin.
Depending on the business and sales channel, taxes, payment or marketplace fees, freight, discounts, and returns may also matter. There is no single treatment in the cited guidance that applies to every jurisdiction and sales model. Decide which expenses are included in your unit-cost figure and account for other relevant costs separately; do not treat the basic gross-margin formula as a complete tax or fee calculator.
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Gross margin does not establish profitability
Meeting a target gross margin does not by itself show that a business is profitable after overhead. To connect unit economics with operating costs, break-even analysis considers overhead as well as the contribution from sales.
- Break-even sales: overhead expenses ÷ contribution margin ratio.
- Break-even units: overhead expenses ÷ (unit selling price − unit cost).
Business Victoria’s break-even guidance describes these calculations. They rely on the business’s own cost and sales figures, so use them as planning calculations rather than a guarantee of results.
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Use the calculated price as a starting point
A cost-based calculation answers what price would meet a chosen margin given a stated cost. It does not determine what customers will pay or which price will maximize profit. Before setting a final price, compare the result with market conditions and competitor prices, as Shopify advises. A price substantially above comparable offers may be difficult to sell, while a lower price may fail to support the costs and margin the business needs.
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