The townsite of Margaret River is located in the south west agricultural area, 277 kilometres south southwest of Perth and 48 kilometres south southwest of Busselton. It is located on the Margaret River from which it derives its name. The precise origin of the naming of the river is not known, but it was possibly named by John Bussell in honour of Margaret Wyche, a friend in England who was expected to follow the Bussell's to Australia. The name is first shown on a map of the region published in 1839.

In 1910 the Margaret River Progress Association wrote to the Minister for Lands requesting a townsite be declared at "the Upper Margaret Bridge". The reason given was that "the district is likely to be dotted with public buildings several miles apart in the near future if a townsite is not made available shortly". The District Surveyor who inspected the area preferred an area near the lower bridge on Caves Road, but this land was not available. Lots were surveyed in 1912, and the Townsite of Margaret River gazetted in 1913. In 1918 the name of the townsite was changed to "Margaret", but it was changed back to Margaret River in 1927, due to local usage of the name always being Margaret River.