How it works
Profit margin shows how much of each dollar of revenue you keep at three levels. Gross margin subtracts only the direct cost of what you sold. Operating margin also subtracts overhead. Net margin subtracts everything, including interest and income taxes.
Gross margin tells you whether your pricing covers production costs; operating margin tells you whether the business model works; net margin is what is left for owners.
Margins vary widely by industry. Software can run 70–90% gross margins, while grocery stores often net 1–3%. Compare against businesses like yours rather than a universal benchmark.
Formula
Gross margin = (Revenue − COGS) ÷ Revenue. Operating margin = (Gross profit − Operating expenses) ÷ Revenue. Net margin = Net profit ÷ Revenue.
Questions people ask
What is the difference between margin and markup?
Margin is profit as a percentage of the selling price; markup is profit as a percentage of cost. A $60 item that cost $40 has a 33.3% margin and a 50% markup.
What is a good net profit margin?
It depends on the industry. Around 10% is often called healthy for a small business, 20% strong, and 5% thin, but retail and restaurants commonly operate below 5% while software and consulting can be well above 20%.
Is depreciation part of operating expenses?
Yes. Depreciation and amortization are normally included in operating expenses, so they reduce operating profit (EBIT). EBITDA margin adds them back.