How to Calculate Profit Margin for Online Sellers (With Fees and VAT)
"I buy it for $10 and sell it for $30, so I make $20." Most new sellers start with this math, and it is usually wrong by several dollars. Here is how to calculate profit margin properly.
The formula
Profit margin = net profit ÷ selling price × 100
And net profit is:
Net profit = selling price + shipping charged − marketplace fees − product cost − your shipping & packaging − other costs − VAT you owe
Three common mistakes
1. Forgetting that fees apply to shipping too
Etsy, eBay and Amazon calculate their percentage fees on the item price plus the shipping you charge. Moving cost from the item price into shipping does not avoid fees.
2. Ignoring fixed fees
A fee like "3% + $0.25" matters a lot on cheap items. On a $5 item, the $0.25 alone is another 5%.
3. Not counting your own shipping and packaging
"Free shipping" is only free for the buyer. Postage, boxes, tape and labels are real costs on every order.
Worked example
A $29.99 item with free shipping, $10 product cost and $5 shipping & packaging, sold on eBay (13.6% + $0.40):
| Item | Amount |
|---|---|
| Sale price | $29.99 |
| eBay fees | −$4.48 |
| Product cost | −$10.00 |
| Shipping & packaging | −$5.00 |
| Net profit | $10.51 |
| Profit margin | 35.0% |
That is about $9.50 less than the "$30 − $10 = $20" guess.
If you are VAT-registered (UK, EU and others)
If your prices include VAT, part of every sale belongs to the tax office. With 20% VAT, one-sixth of a VAT-inclusive amount is VAT. You can usually reclaim the VAT on your costs and fees, so what you owe is:
VAT owed = (sales − costs − fees) × rate ÷ (1 + rate)
The same product sold on Etsy for £29.99 with 20% VAT leaves about £9.74 profit (32.5% margin), compared with £11.69 without VAT. To keep a 25% margin you would need to charge about £25.54.
Margin vs markup
- Margin = profit ÷ selling price. $10.51 ÷ $29.99 = 35.0%.
- Markup = profit ÷ cost. The same sale is a 70% markup on $15 of costs.
They are easy to mix up. Marketplaces and accountants usually talk about margin.
What about income tax?
The profit above is before income tax, which depends on your total yearly profit and allowances. Talk to an accountant for your situation.
Work backwards from your target margin
Instead of guessing a price, decide the margin you need and calculate the minimum price. In the eBay example above, a 25% margin needs a price of at least $25.09. The calculator below does this for every marketplace at once.