Profit Margin
Profit as percentage of revenue.
What does Profit Margin mean?
Profit margin measures how much of every dollar of revenue a business keeps as profit after covering costs. It is one of the most important indicators of a company's financial health and pricing efficiency. A higher margin means the business retains more from each sale, while a low margin may signal high costs or aggressive pricing.
How to calculate Profit Margin
Profit Margin (%) = ((Revenue − Cost) / Revenue) × 100. For example, if revenue is $10,000 and costs are $6,000, profit is $4,000, and profit margin is (4000 / 10000) × 100 = 40%. Markup is calculated differently: Markup (%) = ((Revenue − Cost) / Cost) × 100 = (4000 / 6000) × 100 = 66.7%. Margin and markup both describe profitability, but from different perspectives.
FAQ
Margin is profit divided by revenue (selling price), while markup is profit divided by cost. A 50% markup is equivalent to a 33.3% margin. Margin can never exceed 100%, but markup has no upper limit. Retailers often think in terms of markup; financial analysts prefer margin.
It varies widely by industry. Software companies often have margins of 60–80%, while grocery stores typically operate at 1–3%. A 10% net profit margin is considered average across industries. Compare your margin to industry benchmarks rather than a universal standard.
Gross profit margin only subtracts the direct cost of goods sold (COGS) from revenue. Net profit margin subtracts all expenses — COGS, operating expenses, interest, and taxes. This calculator computes gross margin; net margin requires a full income statement.
Yes. A negative profit margin means costs exceed revenue — the business is losing money on every sale. This can happen during startup phases, heavy discounting, or when input costs spike unexpectedly.
- Increase prices — if the market supports it, even a small price increase can significantly boost margin.
- Reduce cost of goods — negotiate with suppliers, buy in bulk, or find alternative materials.
- Cut operating expenses — streamline processes, reduce waste, automate repetitive tasks.
- Focus on high-margin products — shift sales mix toward more profitable offerings.
Related calculators
- Break-Even— Point where revenue equals cost.
- ROI— Return relative to investment cost.
- Contribution Margin— Revenue minus variable cost.
- Compound Interest— Growth of money with reinvested interest.