What is Profit Margin?
Profit margin is a financial metric that shows what percentage of your revenue is actual profit after subtracting the cost of goods sold (COGS). It's one of the most important indicators of business health and profitability.
A higher profit margin means your business is more efficient at converting sales into actual profit, giving you more room for growth, expenses, and resilience against market changes.
Profit Margin vs Markup
Profit Margin measures profit as a percentage of the selling price (revenue), while Markup measures profit as a percentage of the cost.
Profit Margin:(Profit / Revenue) × 100
Markup:(Profit / Cost) × 100
Example: If an item costs $70 and sells for $100, the profit is $30. The margin is 30% ($30/$100), but the markup is 42.86% ($30/$70).
What is a Good Profit Margin?
A "good" profit margin varies significantly by industry:
- Retail: 2-5% (low margin, high volume)
- Restaurants: 3-10% (food costs and overhead)
- Software/SaaS: 70-90% (minimal COGS)
- Professional Services: 15-20% (labor intensive)
- Manufacturing: 5-20% (varies by product)
- E-commerce: 10-20% (depends on niche)
Generally, a net margin below 5% is concerning, 10% is acceptable, and 20%+ is excellent. However, always compare against your specific industry benchmarks.
Frequently Asked Questions
How do you calculate a 20% profit margin?
To achieve a 20% margin: Convert 20% to decimal (0.2), subtract from 1 to get 0.8, then divide your cost by 0.8. Example: If cost is $80, selling price should be $80 ÷ 0.8 = $100.
What's the difference between gross margin and net margin?
Gross margin only subtracts direct costs (COGS) from revenue. Net margin subtracts all expenses including operating costs, taxes, interest, and overhead. Net margin gives you the true profit percentage.
Can I use this calculator for my restaurant or retail business?
Absolutely! This calculator works for any business type - retail stores, restaurants, e-commerce, manufacturing, service businesses, and more. Simply input your costs and selling prices to calculate your margins.
Should I focus on profit margin or markup?
Both are useful. Margin is better for comparing profitability across products and understanding what percentage of sales is profit. Markup is useful for pricing - telling you how much to add to your costs. Use both for comprehensive analysis.
How often should I calculate my profit margins?
Calculate margins regularly - monthly for overall business performance, and whenever you price a new product. Monitor margins closely during cost changes, seasonal fluctuations, or when running promotions.
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