How to Calculate Profit Margin for Your Business
Profit margin measures what percentage of revenue your business keeps as profit. The two most important metrics are gross profit margin and net profit margin. Gross margin shows profitability after direct costs, while net margin shows profitability after all expenses. Both are expressed as percentages and are essential for pricing decisions, investor analysis, and benchmarking against competitors.
The formulas are straightforward: Gross Profit Margin = (Revenue - Cost of Goods Sold) / Revenue × 100 and Net Profit Margin = Net Income / Revenue × 100. A business with $500,000 in revenue and $200,000 in COGS has a gross margin of 60%. If total expenses (including COGS) are $420,000, net income is $80,000 and net margin is 16%.
Gross Profit Margin
Gross profit margin isolates how efficiently you produce or deliver your product. The formula is:
Gross Profit Margin = (Revenue - COGS) / Revenue × 100
Example: A bakery generates $300,000 in annual revenue. Ingredients, packaging, and direct labor cost $120,000. Gross profit is $180,000, giving a gross margin of 60%. This means 60 cents of every dollar goes toward covering overhead and generating profit.
Net Profit Margin
Net profit margin accounts for every expense — COGS, operating expenses, interest, and taxes:
Net Profit Margin = Net Income / Revenue × 100
Example: The same bakery has $90,000 in rent, $50,000 in salaries, $15,000 in marketing, and $10,000 in other expenses. Total expenses are $285,000. Net income is $15,000, for a net margin of 5%. Despite a healthy 60% gross margin, overhead consumes most of the profit.
Industry Benchmarks
- Software / SaaS: 70-85% gross, 15-25% net
- Professional services: 50-70% gross, 10-20% net
- Retail: 50-60% gross, 2-6% net
- Manufacturing: 25-35% gross, 5-10% net
- Restaurants: 60-70% gross, 3-9% net
- Construction: 20-35% gross, 2-7% net
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Enter your revenue and costs to instantly calculate gross margin, net margin, markup percentage, and profit per unit.
Open Profit Margin CalculatorFrequently Asked Questions
What is the difference between profit margin and markup?
Profit margin is the percentage of revenue that becomes profit: (Revenue - Cost) / Revenue. Markup is the percentage added to cost to get the selling price: (Revenue - Cost) / Cost. A product that costs $60 and sells for $100 has a 40% profit margin but a 66.7% markup. They describe the same dollar amount of profit but use different denominators.
What is a good profit margin for a small business?
It varies significantly by industry. A net profit margin of 7% to 10% is generally considered healthy for most small businesses. Service businesses like consulting or software often achieve 15% to 25%+ net margins, while retail and food service typically operate on thinner margins of 2% to 6%. Gross margins are always higher — retail averages 50% to 60%, while manufacturing runs 25% to 35%.
How can I improve my profit margin?
There are two levers: increase revenue per unit (raise prices, upsell, reduce discounts) or decrease costs (negotiate supplier pricing, reduce waste, automate processes, cut overhead). Analyzing your gross margin by product or service line often reveals which offerings are dragging down overall profitability, letting you focus improvement efforts where they matter most.
Should I focus on gross margin or net margin?
Both matter for different reasons. Gross margin shows how efficiently you produce or deliver your product — it isolates the direct cost of goods sold. Net margin reflects overall business health after all expenses including rent, salaries, marketing, taxes, and interest. A high gross margin with a low net margin suggests your operating expenses are too high relative to revenue.