Understanding Profit Margins

What Are Profit Margins?

Profit margin measures how much of every dollar of revenue a business keeps as profit. It is one of the most fundamental indicators of business health. There are two main types: gross profit margin and net profit margin.

Gross Profit Margin

Gross margin measures profit after subtracting only the cost of goods sold (COGS) — the direct costs of producing your product or delivering your service.

Gross Margin = (Revenue - COGS) / Revenue x 100

If you sell a product for $100 and it costs $60 to make, your gross margin is 40%. This tells you how efficiently you produce goods before accounting for overhead, marketing, rent, and other operating expenses.

Net Profit Margin

Net margin is the bottom line. It subtracts all expenses — COGS, operating expenses, interest, taxes, and everything else — from revenue.

Net Margin = Net Income / Revenue x 100

A company with $1,000,000 in revenue and $50,000 in net income has a 5% net margin. This is the number that matters most for long-term sustainability.

Markup vs. Margin: A Common Confusion

These terms are often confused but they are different calculations:

• Margin is profit as a percentage of the selling price: (Price - Cost) / Price
• Markup is profit as a percentage of the cost: (Price - Cost) / Cost

If you buy something for $60 and sell it for $100, your margin is 40% but your markup is 66.7%. A 50% markup does not equal a 50% margin — it equals a 33.3% margin. Getting this distinction wrong can seriously impact pricing and profitability.

Typical Margins by Industry

• Software/SaaS: 70-85% gross, 15-25% net
• Retail: 25-50% gross, 2-5% net
• Restaurants: 60-70% gross, 3-9% net
• Manufacturing: 25-35% gross, 5-10% net

Calculate your business numbers with our profit margin calculator and make sure your pricing covers all your costs.