As the name suggests, profit margin refers to the money that remains after you deduct your startup expenses. It’s a percentage that measures how profitable your pricing strategy is, how well you control costs, and how efficiently you use raw materials and labor to produce your products or services.
But once you know what profit margin is and why it matters, the next logical question is, “What is a good profit margin for my line of business?” The answer varies by location, industry, business model, age of the business, and growth goals. And major economic events like the COVID-19 shutdown tend to shrink every company’s margins.
Below, you’ll find three formulas to calculate profit margin, a handy list of average profit margins by sector, and tips to give your margins a boost.
Types of profit margin.
There are three types of profit margins business owners, accountants, lenders, creditors, and investors rely on. You can calculate your company’s gross profit margin, operating profit margin, or net profit margin.
Each of these three formulas provides unique insight into your financial health, and helps you make informed business decisions. Read our breakdown of each margin to learn more.
Gross profit margin.
Gross profit is the revenue that remains after you deduct the cost of goods sold (COGS). COGS refers to the costs necessary to produce or manufacture your products or services. Some examples include raw materials, labor wages, and factory overhead expenses.
Gross profit can be found using the following formula:
Gross profit = revenue – cost of goods sold
After you calculate gross profit, you can determine the gross profit margin using this calculation:
Gross profit margin = (gross profit ÷ revenue) x 100
Generally, gross profit margin is a better way to understand the profitability of specific items rather than an entire business. A business with strong total sales could seem healthy on the surface, but might actually suffer losses if high operating expenses aren’t considered. Calculating gross margin can show you if you’re spending too much time or labor on a certain product or service.
Operating profit margin.
Operating profit is the income left after you deduct the cost of goods sold (COGS) and operating expenses (OPEX). We’ve already defined COGS as the direct cost of creating your products or services. By contrast, operating expenses refer to the costs that keep your business up and running. This category includes items like rent, payroll, marketing, and inventory software. Costs like interest payments and taxes aren’t included.
First, calculate your operating profit:
Operating profit = revenue – cost of goods sold – operating expenses
Then, you can use the operating profit margin formula:
Operating profit margin = (operating profit ÷ revenue) x 100
For a more accurate picture overall, it’s best to use the operating profit or net profit margin.
Net profit margin.
Net profit is what remains after you deduct COGS, OPEX, interest, and taxes.
Find your net profit using this formula:
Net profit = revenue – cost of goods sold – operating expenses – interest – taxes
After that, plug your variables into the net profit margin formula:
Net profit margin = (net profit ÷ revenue) x 100
Net profit margin is one of the best indicators of company profitability because it accounts for your major direct and indirect costs. And that’s why net income is the bottom line of the income statement, which reports a company’s profit and losses over time. It’s the big takeaway after you’ve tallied up earnings and costs.
Expect differences between your gross, operating, and net margins.
A great way to illustrate the differences between the margin formulas is to look at a real-world example. Check out Amazon’s margins as of March 2020:
- Gross profit margin: 26.06%
- Operating profit margin: 5.29%
- Net profit margin: 3.36%
Each margin accounts for a little more of your company spending, so your profits are likely to shrink from formula to formula. That said, your business may have a less drastic drop-off between gross profit margins and the other two margins.
Keep in mind a lucrative global company like Amazon will have operating expenses and other costs that far outstrip most startups. So, they can expect their operating and net margins to be thinner.
What is a good profit margin?
An NYU report on U.S. margins revealed the average net profit margin is 7.71% across different industries. But that doesn’t mean your ideal profit margin will align with this number.
As a rule of thumb, 5% is a low margin, 10% is a healthy margin, and 20% is a high margin. But a one-size-fits-all approach isn’t the best way to set goals for your business profitability.
First, some companies are inherently high-margin or low-margin ventures. For instance, grocery stores and retailers are low-margin. They have high expenses, as they need to purchase inventory, employ corporate employees and labor workers, facilitate shipping and distribution, and rent bigger facilities as their sales grow. But low-margin goods, like food and some consumer products, are usually easier to sell. A highly competitive market, like the rideshare war between Uber and Lyft, can also create thin margins.
By contrast, businesses like consulting firms and software-as-a-service (SaaS) companies generally have high gross margins. These businesses have fewer operating costs, no inventory, and require less startup capital to launch. Companies that sell high-dollar products, like jewelry stores, can also fall into this category. Read more here about the most profitable and least profitable industries.
Business age and size play a role in profit margins as well. New businesses often have higher profit margins than large or established firms. Generally, there are fewer sales, fewer people on payroll, and therefore, lower overhead costs. As operations expand, margins usually shrink.
A geographic area can also alter margins for businesses in the same industry. For example, a tech company in San Francisco will have wildly different rent and payroll costs than a tech company in Dallas.
Finally, a good profit margin depends on your growth goals. If you plan to take on investors soon, need to finance a large equipment purchase this quarter, or want to expand your services, you’ll need to increase your margins. We’ll give you tips on how to do this soon.
Average profit margins by industry.
Your profit margin can tell you how well your business performs compared to other market players in your industry.
Although there’s no magic number, a good profit margin will typically fall between 5% and 10%. Below, we’ve compiled the net profit margins for common business sectors.
- Advertising: 3.30%
- Apparel: 5.87%
- Auto and truck: 3.04%
- Auto parts: 3.05%
- Beverage (alcoholic): 7.94%
- Beverage (soft): 18.50%
- Brokerage and investment banking: 17.62%
- Building materials: 4.30%
- Business and consumer services: 3.83%
- Computer services: 4.34%
- Drugs (pharmaceutical): 18.38%
- Education: 9.59%
- Electronics (consumer and office): -3.14%
- Electronics (general): 5.70%
- Engineering and construction: 1.00%
- Entertainment: 11.73%
- Farming and agriculture: 2.47%
- Financial services (non-bank and insurance): 26.94%
- Furniture and home furnishings: 5.15%
- Healthcare products: 9.27%
- Household products: 4.73%
- Information services: 19.13%
- Insurance (general): 6.26%
- Investments and asset management: 21.06%
- Office equipment and services: 4.91%
- Publishing and newspapers: -1.64%
- REIT: 15.17%
- Real estate (development): 6.65%
- Real estate (general and diversified): 19.75%
- Real estate (operations and services): 3.59%
- Recreation: 1.15%
- Restaurants and dining: 10.57%
- Retail (general): 2.44%
- Retail (grocery and food): 1.44%
- Retail (online): 4.57%
- Shoe: 10.48%
- Software (entertainment): 20.53%
- Software (internet): 2.07%
- Software (system and application): 19.54%
- Transportation: 3.79%
If you don’t see your industry above, check the full list on the U.S. Margins by Sector page. You can also see the gross margin, operating margin, and other standard financial metrics for each sector.
Ways to improve your profit margin.
You can increase profitability by raising revenue, reducing costs and expenses, or doing a combination of the two. Here are some tips to achieve your ideal profit margin:
- Reduce your overall operating costs: These include office space and utilities, materials, supplies, wages and benefits, employee spending, insurance, equipment repair, shipping, and business software. Try to negotiate a lower rate, downgrade, or eliminate any unnecessary services.
- Cut underperforming products or services, or add higher-margin products or services: A break-even analysis can help you figure out whether a product is truly profitable. You can draw inspiration from other companies in your sector or dive into the research on high-margin products for your industry. In any case, you’ll need to weigh the cost of goods sold and operating expenses against your desired selling price.
- Adjust your pricing strategy: Experiment with different product pricing methods like value-based pricing or cost-plus pricing. You may be surprised by how product pricing impacts demand.
- Build brand loyalty: Regularly engaging with your customers and showing customer appreciation has a tangible effect on sales and customer retention. Retaining more customers allows you to reduce your advertising costs.
What is a good profit margin? The bottom line.
Profit margin signals a lot about a business. It’s a marker of your profitability, stability, and how attractive you are to investors. You can also use it to understand how you compare with the competition, and evaluate whether your business model is sustainable.
But if you aren’t there right now, don’t worry. Use the strategies above and consider contacting a financial advisor to receive one-on-one guidance.
FAQs
An NYU report on U.S. margins revealed the average net profit margin is 7.71% across different industries. But that doesn't mean your ideal profit margin will align with this number. As a rule of thumb, 5% is a low margin, 10% is a healthy margin, and 20% is a high margin.
What is a good increase in profit margin? ›
A good gross margin figure for online retail is around 45.25%, according to NYU Stern School of Business. To reach a higher gross profit margin, you'll need to develop a pricing strategy for your business. Shopify's profit margin calculator can help you find a profitable selling price for your product.
Is a 33% profit margin good? ›
You may be asking yourself, “what is a good profit margin?” A good margin will vary considerably by industry, but as a general rule of thumb, a 10% net profit margin is considered average, a 20% margin is considered high (or “good”), and a 5% margin is low.
What is the best profit margin ratio? ›
What is a good gross profit margin ratio? On the face of it, a gross profit margin ratio of 50 to 70% would be considered healthy, and it would be for many types of businesses, like retailers, restaurants, manufacturers and other producers of goods.
Is 20% profit margin bad? ›
As a general rule, a 10% net profit margin is deemed good, while a 20% margin is deemed excellent, and a 5% margin is deemed poor. If you want to compare your company's performance based on gross margin and net margin, check out the average profit margin for your sector.
What are 4 ways to increase profit? ›
Four ways to increase business profitability
These are reducing costs, increasing turnover, increasing productivity, and increasing efficiency. You can also expand into new market sectors, or develop new products or services.
What are 3 ways a company can increase profits? ›
There are 3 main ways to improve the profitability of your company: Sell more, price higher and reduce costs. But profits can also be increased by greater cost efficiency.
What's a healthy profit margin? ›
As a rule of thumb, 5% is a low margin, 10% is a healthy margin, and 20% is a high margin. But a one-size-fits-all approach isn't the best way to set goals for your business profitability. First, some companies are inherently high-margin or low-margin ventures.
What is a 75% profit margin? ›
The gross profit margin is a measure to show how much of each sales dollar a company keeps after factoring in cost of goods sold. For example, if a company has a gross profit margin of 75 percent, then for every $1 in sales, the company will keep 75 cents.
What is the best profit margin for small business? ›
But in general, a healthy profit margin for a small business tends to range anywhere between 7% to 10%. Keep in mind, though, that certain businesses may see lower margins, such as retail or food-related companies. That's because they tend to have higher overhead costs.
What are the different types of profit?
- Gross profit. Gross profit is the amount of money remaining after subtracting the cost of goods sold (COGS) from the total income from sales. ...
- Operating profit. Operating profit includes both variable and fixed costs. ...
- Pre-tax profit. ...
- Net profit. ...
- Net profit margin. ...
- Reduce costs.
Profit margin is the difference between the total cost to run your business and the total revenue it brings in. The higher your profit margin, the more money your business gets to keep.
What are the 3 types of profit? ›
Profit is the money you have left after paying for business expenses. There are three main types of profit: gross profit, operating and net profit.
What is a poor profit margin? ›
What Is Low Profit Margin? If you have a low profit margin, this means that the selling price you chose for a good isn't much higher than its cost. If your company has a low profit margin, you're likely in a very competitive industry, offering products that aren't highly unique.
Can you have a 200% profit margin? ›
Margins can never be more than 100 percent, but markups can be 200 percent, 500 percent, or 10,000 percent, depending on the price and the total cost of the offer. The higher your price and the lower your cost, the higher your markup.
What does 200% profit margin mean? ›
For example, if a product costs you $20 to produce (including the cost of labor) and you sell it for $60, the markup formula is ($60 – $20) / $20 = 200%. In other words, you're marking the product up 200%. Your markup amount determines your profit margin.
How can I increase my profit without increasing sales? ›
10 Ways to Boost Profits Without Increasing Sales
- Analyze Gross Margins. ...
- Increase Prices. ...
- Push Your Most Profitable Products. ...
- Differentiate Your Products. ...
- Stop Offering Discounts. ...
- Sell Third-Party Add-Ons. ...
- Cut Down on Wastage. ...
- Take Advantage of Cash Settlement Discounts.
5 Strategies to increase profits
- Increase your leads. ...
- Convert more of your leads into customers. ...
- Increase the number of items you sell per customer. ...
- Increase your average sale. ...
- Increase net profit percentage. ...
- 3 tips to unlock the cash in your business. ...
- 4 Small Business Money Moves for a successful year.
Increase sales
- INTRODUCE NEW PRODUCTS OR SERVICE. Provide a broader range of products or services for your clients. ...
- EXPAND TO NEW DOMESTIC MARKETS. ...
- ENHANCE YOUR SALES CHANNELS. ...
- MARKETING ACTIVITIES. ...
- CHANGE YOUR PRICE. ...
- BE AWARE OF THE COMPETITION. ...
- IMPROVE COMMUNITY RELATIONS. ...
- DON'T NEGLECT CUSTOMER SERVICE.
Although growing your small business will take time and energy, there are 10 strategies you can use to help accelerate business growth.
- Do Your Research. ...
- Build a Sales Funnel. ...
- Increase Customer Retention. ...
- Participate in Networking Events. ...
- Practice Corporate Social Responsibility. ...
- Form Strategic Partnerships.
Strategies to increase sales revenue
- increasing your prices.
- finding new customers.
- selling more to existing customers.
- offering sale promotions to boost the volume of sales.
- developing new product or service lines.
- selling in new markets.
According to the Corporate Finance Institute, 5 percent profit margins are considered low, while 10 percent margins are average and 20 percent margins are high. That said, just because your small business might have a higher profit margin than another company doesn't mean you're making more money than they are.
What is a good markup? ›
What is a Good Markup Percentage? While there is no set “ideal” markup percentage, most businesses set a 50 percent markup. Otherwise known as “keystone”, a 50 percent markup means you are charging a price that's 50% higher than the cost of the good or service.
Is 80 percent a good profit margin? ›
“However, in the consulting world, margins can be 80% or more – oftentimes exceeding 100% to 300%.” On the other hand, restaurant profit margins tend to be razor thin, ranging from 3% to 5% for a healthy business. Consequently, your industry is another indicator of your profit margin.
How do you add 40% profit? ›
Here's the scenario: They'd like to have a 40% profit and usually take the cost, (let's say that's $100.00), and simply multiply it by 40% and add that figure to the $100 which is then assigned as the retail price.
What is 30% profit margin? ›
For instance, a 30% profit margin means there is $30 of net income for every $100 of revenue. Generally, the higher the profit margin, the better, and the only way to improve it is by decreasing costs and/or increasing sales revenue.
How do you get a 40% profit margin? ›
If a new product costs $70 and you want to keep the 40 percent profit margin, divide the $70 by 1 minus 40 percent – 0.40 in decimal. The $70 divided by 0.60 produces a price of $116.67. The profit margin in dollars comes out to $46.67.
How much profit should a business make in the first year? ›
Most businesses don't make any profit in their first year of business, according to Forbes. In fact, most new businesses need 18 to 24 months to reach profitability.
What are the 7 pillars of profit? ›
Here the Seven Pillars to Profit are broken down into a chapter for each pillar: Finance, Sales, Marketing, Operations, Human Resources, Leadership, and Change.
What is the profit formula? ›
Finding profit is simple using this formula: Total Revenue - Total Expenses = Profit.
Profit is simply total revenue minus total expenses. It tells you how much your business earned after costs. Since the primary goal of any business is to earn money, profit is a clear indication of how your company is functioning and performing in the market.
What is the most important type of profit? ›
Gross profit
That's because it's the most important number the lifeblood of the business.
What are the two most important uses of profit? ›
Profits are important because:
– they provide a measure of success of a business which is important for new businesses. – they are the best source of finance/capital to invest in expanding the business. – they attract further funds from investors enticed by the possibility of high returns on their investment.
What is the normal profit? ›
Normal profit is an economic term that refers to a situation where the total revenues of a company are equal to the total costs in a perfectly competitive market. It means that the company makes sufficient revenues to cover the overall cost of production and remain competitive in its respective industry.
What is the least profitable business? ›
Oil and gas extraction
This being said, despite the almost urban legend around "striking oil" you might be surprised to learn that oil and gas extraction is regularly cited as one of the least profitable industries for small business owners—if not the least, period.
Is a higher profit margin better or worse? ›
A higher profit margin is always desirable since it means the company generates more profits from its sales. However, profit margins can vary by industry. Growth companies might have a higher profit margin than retail companies, but retailers make up for their lower profit margins with higher sales volumes.
What does 100% profit mean? ›
If an investor makes $10 revenue and it cost them $5 to earn it, when they take their cost away they are left with 50% margin. They made 100% profit on their $5 investment.
What does 50% profit mean? ›
If you spend $1 to get $2, that's a 50 percent Profit Margin. If you're able to create a product for $100 and sell it for $150, that's a Profit of $50 and a Profit Margin of 33 percent. If you're able to sell the same product for $300, that's a margin of 66 percent.
What is 5% profit on 1000? ›
Answer: 5% of 1000 is 50.
What is double profit? ›
For example, if your total revenue is $100 and your costs are $80, then your profit is $20 (20%). To double your profit to $40 (40%), you need to leave costs the same while raising your price by an amount equal to your profit ($20).
Markup of 2X, or 50% margin to you, is generally normal. It really depends on your category of products and what channel you are in. But as a general rule, for specialty retail stores, which I am guessing you fall into, margin is 50-65%, then drug at 42-45%, grocery at 35-40%, mass at 25-30% and club at 14%.
What does a 40% profit margin mean? ›
In short, your profit margin or percentage lets you know how much profit your business has generated for each dollar of sale. For example, a 40% profit margin means you have a net income of $0.40 for each dollar of sales.
What does an 80% profit margin mean? ›
The gross profit margin is a measure to show how much of each sales dollar a company keeps after factoring in cost of goods sold. For example, if a company has a gross profit margin of 75 percent, then for every $1 in sales, the company will keep 75 cents.
Is 13% profit margin good? ›
But in general, a healthy profit margin for a small business tends to range anywhere between 7% to 10%. Keep in mind, though, that certain businesses may see lower margins, such as retail or food-related companies. That's because they tend to have higher overhead costs.
Can you make 100% profit? ›
The higher the price and the lower the cost, the higher the Profit Margin. In any case, your Profit Margin can never exceed 100 percent, which only happens if you're able to sell something that cost you nothing.
What is a 30% profit margin? ›
For instance, a 30% profit margin means there is $30 of net income for every $100 of revenue. Generally, the higher the profit margin, the better, and the only way to improve it is by decreasing costs and/or increasing sales revenue.
Why is Walmart's profit margin so low? ›
Walmart keeps relatively low prices as compared to the competitors and hence it earns very low profit-margin on the sales revenue. Relatively low prices than competitors allows Walmart to capture the maximum market share thereby achieving phenomenal sales volume.
