Profit margin reveals how much money your business actually keeps from each dollar of sales. This calculator helps you analyze profitability across gross, operating, and net margins—essential metrics for any business owner or investor.
How This Calculator Works
This calculator computes key profitability metrics:
- Revenue: Total sales or income
- Cost of Goods Sold (COGS): Direct costs to produce goods/services
- Operating Expenses: Overhead like rent, salaries, marketing
- Other Costs: Interest, taxes, one-time expenses
- Margin Types: Gross, operating, and net profit margins
The Formula Explained
Gross Profit = Revenue - Cost of Goods Sold Gross Margin = (Gross Profit / Revenue) Ă— 100
Operating Profit = Gross Profit - Operating Expenses Operating Margin = (Operating Profit / Revenue) Ă— 100
Net Profit = Operating Profit - Taxes - Interest Net Margin = (Net Profit / Revenue) Ă— 100
Step-by-Step Example
Small Business Profitability Analysis
| Line Item | Amount |
| Revenue | $500,000 |
| Cost of Goods Sold | $200,000 |
| Gross Profit | $300,000 (60%) |
| Operating Expenses | $180,000 |
| Operating Profit | $120,000 (24%) |
| Interest & Taxes | $30,000 |
| Net Profit | $90,000 (18%) |
This business keeps 18 cents of every dollar in revenue.
Frequently Asked Questions
What is profit margin and why does it matter?
Profit margin shows what percentage of revenue becomes profit. A 20% margin means you keep $0.20 per dollar of sales; $0.80 goes to costs. Margins help you understand business efficiency, compare to competitors, make pricing decisions, and track improvement over time.
What's the difference between gross, operating, and net margin?
Gross margin: Revenue minus direct product costs—measures production efficiency. Operating margin: Also subtracts overhead—measures business operations efficiency. Net margin: After all expenses including taxes/interest—the bottom line that matters to owners. Each tells different parts of the profitability story.
What is a good profit margin?
It varies dramatically by industry. Grocery stores: 1-3% net margin. Restaurants: 3-9%. Software/SaaS: 20-30%+. Consulting: 15-25%. Compare to industry benchmarks and competitors, not arbitrary numbers. Improving your own margins over time is what matters most.
How can I improve my profit margins?
Two approaches: (1) Increase revenue without proportional cost increases—raise prices, upsell, improve conversion. (2) Decrease costs—negotiate with suppliers, reduce waste, improve efficiency, automate processes. Typically, cutting costs is faster; growing revenue is more sustainable long-term.
What's the difference between margin and markup?
Margin = profit as percentage of selling price (external perspective). Markup = profit as percentage of cost (internal perspective). If you buy for $60 and sell for $100: Margin = 40% ($40/$100), Markup = 67% ($40/$60). Both describe the same $40 profit differently.
How does volume affect profit margin?
Higher volumes can improve margins through economies of scale—fixed costs spread over more units. However, volume-focused strategies may require lower prices, reducing margin per unit. Optimal strategy: find the volume/margin combination that maximizes total profit, not just one metric.
Why might a company have high revenue but low margins?
Common causes: (1) Commodity products with price competition, (2) High COGS with thin markups (retail, grocery), (3) Heavy investments in growth sacrificing current profits, (4) Inefficient operations or overspending, (5) Market position not allowing premium pricing. Low margins require high volume to generate solid profits.
Should I focus on margin or total profit?
Both matter for different decisions. Margin shows efficiency—how well you convert revenue to profit. Total profit is absolute dollars earned. A 10% margin on $1M ($100K profit) beats a 50% margin on $100K ($50K profit). Use margin for efficiency analysis, total profit for business value.
Key Points to Remember
- Know all three margins: Gross, operating, and net tell different stories
- Benchmark by industry: "Good" margin varies wildly across sectors
- Margin Ă— Volume = Profit: Both components matter
- Track trends: Improving margins over time signals operational excellence
- Margin vs Markup: Don't confuse them in pricing decisions