How to Calculate Profit Margin (with formula)

Your profit margin is the percentage of total revenue your business keeps (as profit) after deducting expenses. The higher your margin, the more money you keep from every dollar of sales revenue. Here’s what you need to know about the margin formula for gross margin, net margin, operating profit, and more!

What is a profit margin?

A profit margin measures how much profit your business earns relative to its revenue, which is expressed as a gross margin percentage or net margin percentage.

Profit margins give you insights into assessing your financial strength. They help you calculate profit and compare against industry benchmarks, as well as avoid common mistakes in your pricing strategies or cost management.

How do you calculate gross profit margin?

To calculate gross profit margin, all you need to do is subtract your cost of goods sold (COGS) from your revenue. Then divide by revenue and multiply by 100. The gross profit margin formula and gross margin formula are the same:

Gross profit margin = (Revenue – COGS) / Revenue × 100

Your gross profit is the money left after paying things like raw materials and production costs. The gross profit margin calculation doesn’t include business expenses such as overhead costs, employee salaries, and taxes.

If, for example, your business generates $100,000 in revenue and incurs $60,000 in cost of goods sold, here’s the calculation: ($100,000 – $60,000) / $100,000 × 100 = 40%. So for every dollar of revenue, you make 40 cents of gross profit.

What is a good gross profit margin?

It ultimately depends on your industry. Retail businesses tend to have low profit margins of around 25–35%. Software and services businesses, on the other hand, usually have high profit margins above 60%.

Compare your gross margin percentage against industry benchmarks to see if your business is competitive. Low margins could be a sign of high production costs or weak pricing strategies. A profitable business always stays on top of its margins.

How do you calculate net profit margin?

The net profit margin calculation includes all expenses, not just COGS. The following formula is:

Net profit margin = (Revenue – All Expenses) / Revenue × 100

‘All expenses’ means operating expenses, employee salaries, taxes, interest, depreciation, and any other expenses. Your net profit is the final profit your business takes home.

Using the same example: revenue of $100,000, COGS of $60,000, operational expenses of $20,000, taxes of $5,000 and interest of $3,000. Net profit margin = ($100,000 – $88,000) / $100,000 × 100 = 12%.

How do you calculate operating profit margin?

Operating profit is your gross profit minus operating costs and depreciation. It doesn’t include interest and taxes. The profit margin formula is:

Operating profit margin = (Gross Profit – Operating Expenses) / Revenue × 100

Operating profit shows how well your core business runs, and it’s a major indicator of operational quality before financing costs. A higher operating profit margin means your business runs as an efficient operation.

What is a sales margin?

A sales margin is another way to describe profit margin. It measures the difference between your sales price and the cost of producing/purchasing the product. A higher sales margin means you keep more of each sale as profit.

To calculate your sales margin, use: (Sales Price – Cost) / Sales Price × 100. This gives you the margin as a percentage of total revenue. Use it in tandem with your profit margin calculation to set your pricing.

What is the difference between gross and net profit margin?

Gross margin only deducts costs like goods sold. Net margin deducts all other expenses including operating costs, taxes, interest, etc. Gross margin shows how much profit you generate profit from sales. Net margin, on the other hand, shows your actual take-home profit.

Both are handy for figuring out your company’s profitability and determining its financial health. Track them together to manage expenses and plan for sustainable growth.

How can you improve your profit margins?

To improve low margins, reduce your cost of goods sold, cut out unnecessary operational expenses or increase your sales price. Even the smallest changes in purchase price or selling price can have a huge impact on higher margins.

Use good-quality accounting software to calculate gross profit margin, track your profit margin calculation, and stay on top of how much profit you are keeping over time. Doing this will help with spotting areas for improvement and making better decisions about different business models.

To calculate profit margin, always review your margins at least monthly. Compare your company’s profit margins against competitors in your industry. A good gross profit margin combined with a strong net margin means your business has both competitive pricing and controlled costs.

Finally, make sure you set pricing strategies based on data, not guesswork. A profitable business tracks margins consistently to guarantee sustainable growth and financial strength over time.

See relate terms
What is gross profit?
Gross profit vs net profit (comparison)
What is net profit?