Profit Margin: What It Is and How to Calculate It

Profit margin tells you how much of each dollar of revenue a business keeps as profit. It is the single most commonly cited metric for measuring business profitability — and it comes in three different flavors depending on which costs you factor in.

Gross, operating, and net margin

Gross margin = (Revenue − Cost of Goods Sold) / Revenue × 100. It measures profit before overhead costs. Operating margin subtracts operating expenses (salaries, rent, utilities) from the gross profit. Net margin — often called "the bottom line" — is what remains after all expenses, interest, and taxes.

How to set a price using margin

If you want a 40% gross margin on a product that costs you $60 to make, use the formula: Price = Cost / (1 − Margin Rate). That is $60 / 0.60 = $100. This is different from a 40% markup, which would give you $60 × 1.40 = $84. Margin and markup are related but calculated differently — a common source of pricing errors.

What margins mean by industry

Margins vary enormously by industry. Software companies often have gross margins above 70%; grocery stores may have gross margins of 20–25% but slim net margins under 5%. Comparing your margin to industry benchmarks matters more than the absolute number.