Profit Margin Calculator
Calculate your gross, operating, and net profit margin from revenue, cost of goods sold (COGS), operating expenses, and taxes. See exactly how much of every dollar you keep as profit at each stage.
What Is Profit Margin?
Profit margin is the percentage of revenue that remains as profit after deducting costs. It answers a simple question: for every dollar of sales, how many cents do you actually keep? A 40% gross margin means you keep 40 cents of every dollar before operating costs, taxes, and interest.
There are three levels of profit margin, and each one tells a different story about your business:
The Three Types of Profit Margin
Gross margin measures production efficiency. It is revenue minus COGS, divided by revenue. A high gross margin means you buy or produce cheaply and sell at a healthy markup. Software companies often show 70–85% gross margins; grocery stores typically show 20–30%.
Operating margin measures how efficiently the business runs day to day. It subtracts operating expenses (rent, salaries, marketing) from gross profit. This is where management quality shows up: two companies with identical gross margins can have very different operating margins depending on how they run the business.
Net margin is the bottom line — what remains after every cost, including interest and taxes. This is the number that goes to shareholders. A healthy net margin varies by industry: 5–10% is typical for retail, 15–25% for manufacturing, and 20%+ for software and services.
Profit Margin Formula
Each margin uses the same basic structure:
Profit Margin = (Profit ÷ Revenue) × 100
- Gross Profit = Revenue − COGS
- Operating Profit = Gross Profit − Operating Expenses
- Net Profit = Operating Profit − Interest − Taxes
The expense ratio is the inverse: total expenses divided by revenue. A 85% expense ratio means 85 cents of every dollar goes to costs, leaving 15 cents as net profit.
Worked Example
A business has $10,000 revenue, $6,000 COGS, $2,000 operating expenses, and $500 in taxes and interest:
- Gross profit = $10,000 − $6,000 = $4,000 → gross margin = 40%
- Operating profit = $4,000 − $2,000 = $2,000 → operating margin = 20%
- Net profit = $2,000 − $500 = $1,500 → net margin = 15%
- Total expenses = $6,000 + $2,000 + $500 = $8,500 → expense ratio = 85%
Frequently Asked Questions
What is a good profit margin?
It depends on the industry. Gross margins under 20% are typical for grocery and retail; 40–60% for manufacturing; 70%+ for software. Net margins of 5–10% are normal for retail, 10–20% for services, and 20%+ for software and specialized manufacturing. Compare against your industry, not against an arbitrary number.
What is the difference between profit margin and markup?
Markup is calculated from cost, margin is calculated from revenue. If you buy for $60 and sell for $100, your markup is 67% (40 ÷ 60) but your margin is 40% (40 ÷ 100). The same transaction gives two different percentages — mix them up and your pricing will be wrong.
Can profit margin be negative?
Yes. If total costs exceed revenue, net margin is negative — a loss. A negative gross margin means you are selling below cost, which is usually unsustainable. A negative net margin with a positive gross margin means overheads or interest are consuming the profit.
What is a good operating margin?
Operating margins of 15–20% are considered healthy for most businesses. Above 25% is strong. Below 10% is thin and leaves little cushion for downturns, price competition, or unexpected costs.
How do I improve my profit margin?
Three levers: raise prices, lower COGS (negotiate supplier terms, find cheaper inputs, reduce waste), or reduce operating expenses (automate, renegotiate rent, cut low-ROI marketing). Raising price by 5% often has a bigger effect on net margin than cutting costs by 5%, because revenue flows directly to the bottom line.
Why does gross margin differ from net margin so much?
Gross margin only subtracts direct production costs. Net margin subtracts everything else — rent, salaries, marketing, interest, taxes. A company with 60% gross margin and 5% net margin is spending 55% of revenue on overheads and taxes, which is normal for many service businesses.