How to Calculate Profit Margin for Your Business

Revenue means nothing without profit. A business doing $500,000 in sales might be less profitable than one doing $100,000 — it all depends on the margins. If you don't understand your profit margins, you're flying blind.

Let's break down the three types of profit margin, how to calculate each one, and what "good" looks like in different industries.

The Three Types of Profit Margin

There are three profit margins that tell you different things about your business health:

Gross Profit Margin: Your Product's Profitability

Gross margin tells you how much money you keep after paying for the products or services you sell. It doesn't include overhead like rent, salaries, or marketing — just the direct cost of what you sold.

Example: You sell handmade candles for $25 each. The wax, wick, jar, fragrance, and label cost you $8 per candle.

Gross Profit = $25 - $8 = $17 per candle
Gross Profit Margin = $17 ÷ $25 × 100 = 68%

A 68% gross margin is healthy. For every dollar in sales, you keep 68 cents before overhead costs. If your gross margin is low, you either need to raise prices or lower production costs.

Operating Profit Margin: Your Business Efficiency

Operating margin includes your overhead — rent, utilities, salaries, marketing, software, insurance. This shows how efficiently you run your business day-to-day.

Example: Your candle business does $10,000/month in revenue with $3,200 in COGS and $4,500 in operating expenses (rent, marketing, shipping, Etsy fees).

Operating Profit = $10,000 - $3,200 - $4,500 = $2,300
Operating Profit Margin = $2,300 ÷ $10,000 × 100 = 23%

Net Profit Margin: What You Actually Keep

Net margin is the bottom line — what's left after everything, including taxes and interest on any loans.

Example: Continuing with the candle business — after $2,300 in operating profit, you pay $460 in taxes (20%). Net profit = $1,840. Net margin = 18.4%.

Industry Benchmarks: What's "Good"?

If your margin is below your industry average, investigate where the money is going. If it's above average, you're running a tight ship.

How to Improve Your Profit Margins

Raise prices strategically. Most small businesses underprice. A 10% price increase on a product with 50% margins increases your profit by 20%. Test small increases and monitor whether sales volume changes.

Reduce COGS. Negotiate with suppliers, buy in bulk, find alternative materials, or streamline production. Every dollar saved in COGS goes straight to your bottom line.

Cut wasteful overhead. Audit subscriptions, renegotiate rent, and eliminate expenses that don't directly contribute to revenue. Many businesses carry 10-15% in unnecessary overhead.

Focus on high-margin products. Not all products are equally profitable. Identify your highest-margin offerings and push marketing toward those.

Automate repetitive tasks. Time is money, especially if you're paying employees. Software that saves 10 hours/week at $25/hour saves $13,000/year.

Common Profit Margin Mistakes

Ignoring all costs. Many business owners only track COGS and forget to include their own time, transaction fees, shipping, returns, and taxes. This leads to margins that look healthy on paper but feel tight in practice.

Competing only on price. Racing to the bottom destroys margins. Compete on quality, speed, service, or uniqueness instead.

Not tracking margins per product. Your overall margin might be fine, but individual products could be losing money. Track margins at the product level.

Calculate Your Margins

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The Bottom Line

Profit margin is the health metric of your business. Track it monthly, know your industry benchmarks, and make decisions that protect your margins. Revenue growth means nothing if your margins are shrinking — profitability always comes first.