Profit Margin Formula

Gross Profit Margin

Measures profit after direct costs (cost of goods sold) but before operating expenses.

Shows pricing power and cost control for products/services.

Net Profit Margin

Measures profit after all expenses (the bottom line). Most comprehensive profitability measure.

Shows overall business profitability and efficiency.

Gross Profit Margin:

• ✓Shows pricing power and cost control
• ✓High gross margin = can charge premium prices or have low costs
• ✓Low gross margin = may need to reduce costs or raise prices

Net Profit Margin:

• ✓Shows overall business profitability
• ✓High net margin = efficient operations and good expense control
• ✓Low net margin = may need to reduce expenses or increase revenue

High-Margin Industries:

• • Software/SaaS: 70-90% gross, 15-25% net
• • Professional services: 60-80% gross, 15-30% net
• • Healthcare: 50-70% gross, 10-20% net

Medium-Margin Industries:

• • Manufacturing: 30-50% gross, 5-15% net
• • Construction: 20-40% gross, 3-10% net
• • Retail: 30-50% gross, 2-8% net

Low-Margin Industries:

• • Restaurants: 20-30% gross, 3-7% net
• • Grocery: 15-25% gross, 1-3% net
• • Transportation: 10-20% gross, 2-5% net

1. Increase Prices

If you have pricing power, raise prices to improve margins. Test increases carefully to avoid losing customers.

2. Reduce Cost of Goods Sold

Negotiate better supplier terms, improve production efficiency, or find lower-cost materials. Lower COGS improves gross margin.

3. Control Operating Expenses

Cut unnecessary costs, automate processes, or renegotiate contracts. Lower expenses improve net margin.

4. Increase Sales Volume

More sales spread fixed costs over more units, improving margins. Focus on high-margin products/services.

What's a good profit margin for a small business?

It depends on your industry. Generally, 10-20% net profit margin is considered good for most small businesses. Service businesses often have higher margins (20-30%), while retail and restaurants have lower margins (3-7%). Compare to industry benchmarks.

What's more important: gross margin or net margin?

Both matter. Gross margin shows pricing power and cost control. Net margin shows overall profitability after all expenses. Lenders focus more on net margin because it reflects your ability to generate profit and repay loans.

How do profit margins affect loan approval?

Lenders check profit margins to assess your ability to generate profit and repay loans. Higher margins improve approval chances and get better rates. Low or negative margins are red flags. Learn about how to qualify for business loans.

Can profit margins be too high?

Extremely high margins (50%+ net) can indicate pricing too high (risking customer loss) or underinvestment in growth. However, high margins are generally positive and show strong business performance.