Profit margin answers a simple question: out of every dollar of sales, how much does the business keep? The answer changes depending on which costs you subtract, so this calculator shows the three standard levels — gross, operating and net — together, along with a chart of where each revenue dollar goes.
How to use the profit margin calculator
- Enter revenue for the period (total sales, net of returns and discounts).
- Enter cost of goods sold: materials, merchandise and direct labor tied to what you sold.
- Enter operating expenses: rent, salaries, marketing, utilities, software, depreciation.
- Enter interest and income taxes if you want the net margin to be complete.
- Read the net profit margin on the tape and the gross and operating levels below it.
Profit margin formulas
Each margin is the profit at that level divided by the same revenue figure, so they can be compared directly and always decrease from gross to net.
Worked example
A small manufacturer had $250,000 of revenue, $140,000 of cost of goods sold, $60,000 of operating expenses and $15,000 of interest and income tax.
Gross profit = 250,000 − 140,000 = $110,000 → gross margin 44%
Operating profit = 110,000 − 60,000 = $50,000 → operating margin 20%
Net profit = 50,000 − 15,000 = $35,000 → net margin 14%
Out of each sales dollar, 56 cents covers the product, 24 cents covers overhead, 6 cents goes to interest and tax, and 14 cents is profit.
Typical margins by business type
| Business type | Gross margin | Net margin |
|---|---|---|
| Grocery store | 25% – 30% | 1% – 3% |
| Restaurant | 60% – 70% | 3% – 6% |
| General retail | 30% – 50% | 2% – 5% |
| Construction contractor | 15% – 25% | 3% – 7% |
| Professional services | 50% – 70% | 10% – 20% |
| Software (SaaS) | 70% – 85% | 10% – 25% |
These are broad illustrations to show how much margins vary between models, not targets for any particular business.
Improving profit margin
Raise prices or change the mix
A small price increase flows almost entirely to profit. On the example above, raising prices 3% with no loss of volume adds $7,500 of revenue and lifts the net margin from 14% to about 16.5%. Shifting sales toward higher-margin products has a similar effect.
Lower the cost of goods
Better supplier terms, less waste and fewer returns raise gross margin. Every 1-point gain in gross margin carries straight through to net margin when overhead stays fixed.
Control overhead
Operating expenses that don’t scale with sales — rent, salaried staff, subscriptions — are where operating leverage comes from. As revenue grows faster than overhead, operating margin widens.
Margin is not the same as markup
A 44% gross margin corresponds to a 78.57% markup on cost. If you set prices by markup, convert carefully using the margin calculator. For a fuller set of ratios, including returns on assets and equity, use the profitability ratios calculator.
Results are estimates based on the figures you enter and are not accounting or tax advice.
Frequently asked questions
How do I calculate profit margin?
Divide profit by revenue and multiply by 100. Use gross profit for the gross margin, operating profit for the operating margin, or net profit for the net margin. A business with $35,000 of net profit on $250,000 of revenue has a 14% net margin.
What is a good profit margin for a small business?
It varies by industry. Net margins of 7% to 10% are often described as healthy for many small businesses, while restaurants and grocers typically run 2% to 6% and consulting or software firms can exceed 20%.
What is the difference between gross and net profit margin?
Gross margin subtracts only the direct cost of the goods or services sold. Net margin subtracts everything: operating expenses, interest and income taxes. Gross margin shows pricing power; net margin shows overall profitability.
Can profit margin be negative?
Yes. If costs exceed revenue at any level, that margin is negative and represents a loss. The calculator shows negative margins and flags a net loss.