Profit Margin

Profit margin is profit as a percentage of revenue: (revenue minus cost) divided by revenue. The denominator is revenue, and that is the detail that separates margin from markup — a distinction that costs businesses real money when confused.

There are three margins and they answer different questions. Gross margin subtracts only the direct cost of goods sold and shows whether the product itself is economically viable. Operating margin further subtracts operating expenses — rent, salaries, marketing — and shows whether the business as run is viable. Net margin subtracts everything remaining, including interest and tax, and shows what actually reaches the owner. A business can hold a healthy gross margin and still lose money if operating expenses consume it.

Margin can never reach or exceed 100%, because profit cannot exceed revenue. If a calculation produces a margin above 100%, the inputs have been swapped and markup has been entered where margin belongs.

The practical use is pricing. Small margin changes move profit far more than equivalent revenue changes, because a margin improvement applies to every unit without adding cost. On a thin margin, a modest price increase can shift profit substantially, while chasing the same profit through volume alone requires a large increase in sales and usually in costs too.

Comparing margins across industries is close to meaningless. Grocery retail runs on thin margins and high turnover; software runs on wide margins and different cost structures entirely. The useful comparisons are against your own history and against direct competitors in the same business. Everything runs in your browser — no login, no upload, and no figure you enter leaves the page.