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What is a good profit margin? Industry averages and how to improve yours.

As the name suggests, profit margin refers to the money that remains after you deduct your startup expenses. It\u2019s a percentage that measures how profitable your pricing strategy is, how well you control costs, and how efficiently you use raw materials and labor to produce your products or services.

But once you know what profit margin is and why it matters, the next logical question is, \u201cWhat is a good profit margin for my line of business?\u201d The answer varies by location, industry, business model, age of the business, and growth goals. And major economic events like the COVID-19 shutdown tend to shrink every company\u2019s margins.\u00a0

Below, you\u2019ll find three formulas to calculate profit margin, a handy list of average profit margins by sector, and tips to give your margins a boost.

Types of profit margin.

There are three types of profit margins business owners, accountants, lenders, creditors, and investors rely on. You can calculate your company\u2019s gross profit margin, operating profit margin, or net profit margin.

Each of these three formulas provides unique insight into your financial health, and helps you make informed business decisions. Read our breakdown of each margin to learn more.\u00a0

Gross profit margin.

Gross profit is the revenue that remains after you deduct the cost of goods sold (COGS). COGS refers to the costs necessary to produce or manufacture your products or services. Some examples include raw materials, labor wages, and factory overhead expenses.\u00a0\u00a0

Gross profit can be found using the following formula:\u00a0

Gross profit = revenue \u2013 cost of goods sold

After you calculate gross profit, you can determine the gross profit margin using this calculation:\u00a0

Gross profit margin = (gross profit \u00f7 revenue) x 100

Generally, gross profit margin is a better way to understand the profitability of specific items rather than an entire business. A business with strong total sales could seem healthy on the surface, but might actually suffer losses if high operating expenses aren\u2019t considered. Calculating gross margin can show you if you\u2019re spending too much time or labor on a certain product or service.

Operating profit margin.

Operating profit is the income left after you deduct the cost of goods sold (COGS) and operating expenses (OPEX). We\u2019ve already defined COGS as the direct cost of creating your products or services. By contrast, operating expenses refer to the costs that keep your business up and running. This category includes items like rent, payroll, marketing, and inventory software. Costs like interest payments and taxes aren\u2019t included.\u00a0

First, calculate your operating profit:

Operating profit = revenue \u2013 cost of goods sold \u2013 operating expenses

Then, you can use the operating profit margin formula:\u00a0

Operating profit margin = (operating profit \u00f7 revenue) x 100

For a more accurate picture overall, it\u2019s best to use the operating profit or net profit margin.

Net profit margin.

Net profit is what remains after you deduct COGS, OPEX, interest, and taxes.\u00a0

Find your net profit using this formula:

Net profit = revenue \u2013 cost of goods sold \u2013 operating expenses \u2013 interest \u2013 taxes

After that, plug your variables into the net profit margin formula:

Net profit margin = (net profit \u00f7 revenue) x 100

Net profit margin is one of the best indicators of company profitability because it accounts for your major direct and indirect costs. And that\u2019s why net income is the bottom line of the income statement, which reports a company\u2019s profit and losses over time. It\u2019s the big takeaway after you\u2019ve tallied up earnings and costs.\u00a0

Expect differences between your gross, operating, and net margins.

A great way to illustrate the differences between the margin formulas is to look at a real-world example. Check out Amazon\u2019s margins as of March 2020:

  • Gross profit margin: 26.06%
  • Operating profit margin: 5.29%
  • Net profit margin: 3.36%

Each margin accounts for a little more of your company spending, so your profits are likely to shrink from formula to formula. That said, your business may have a less drastic drop-off between gross profit margins and the other two margins.\u00a0\u00a0

Keep in mind a lucrative global company like Amazon will have operating expenses and other costs that far outstrip most startups. So, they can expect their operating and net margins to be thinner.\u00a0

What is a good profit margin?

An NYU report on U.S. margins revealed the average net profit margin is 7.71% across different industries. But that doesn\u2019t mean your ideal profit margin will align with this number.\u00a0

As a rule of thumb, 5% is a low margin, 10% is a healthy margin, and 20% is a high margin. But a one-size-fits-all approach isn\u2019t the best way to set goals for your business profitability.

First, some companies are inherently high-margin or low-margin ventures. For instance, grocery stores and retailers are low-margin. They have high expenses, as they need to purchase inventory, employ corporate employees and labor workers, facilitate shipping and distribution, and rent bigger facilities as their sales grow. But low-margin goods, like food and some consumer products, are usually easier to sell. A highly competitive market, like the rideshare war between Uber and Lyft, can also create thin margins.

By contrast, businesses like consulting firms and software-as-a-service (SaaS) companies generally have high gross margins. These businesses have fewer operating costs, no inventory, and require less startup capital to launch. Companies that sell high-dollar products, like jewelry stores, can also fall into this category. Read more here about the most profitable and least profitable industries.

Business age and size play a role in profit margins as well. New businesses often have higher profit margins than large or established firms. Generally, there are fewer sales, fewer people on payroll, and therefore, lower overhead costs. As operations expand, margins usually shrink.\u00a0

A geographic area can also alter margins for businesses in the same industry. For example, a tech company in San Francisco will have wildly different rent and payroll costs than a tech company in Dallas.

Finally, a good profit margin depends on your growth goals. If you plan to take on investors soon, need to finance a large equipment purchase this quarter, or want to expand your services, you\u2019ll need to increase your margins. We\u2019ll give you tips on how to do this soon.

Average profit margins by industry.

Your profit margin can tell you how well your business performs compared to other market players in your industry.\u00a0

Although there\u2019s no magic number, a good profit margin will typically fall between 5% and 10%. Below, we\u2019ve compiled the net profit margins for common business sectors.

  • Advertising: 3.30%
  • Apparel: 5.87%
  • Auto and truck: 3.04%
  • Auto parts: 3.05%
  • Beverage (alcoholic): 7.94%
  • Beverage (soft): 18.50%
  • Brokerage and investment banking: 17.62%
  • Building materials: 4.30%
  • Business and consumer services: 3.83%
  • Computer services: 4.34%
  • Drugs (pharmaceutical): 18.38%
  • Education: 9.59%
  • Electronics (consumer and office): -3.14%
  • Electronics (general): 5.70%\t
  • Engineering and construction: 1.00%
  • Entertainment: 11.73%
  • Farming and agriculture: 2.47%
  • Financial services (non-bank and insurance): 26.94%
  • Furniture and home furnishings: 5.15%
  • Healthcare products: 9.27%
  • Household products: 4.73%
  • Information services: 19.13%
  • Insurance (general): 6.26%
  • Investments and asset management: 21.06%
  • Office equipment and services: 4.91%
  • Publishing and newspapers: -1.64%
  • REIT: 15.17%
  • Real estate (development): 6.65%
  • Real estate (general and diversified): 19.75%
  • Real estate (operations and services): 3.59%
  • Recreation: 1.15%
  • Restaurants and dining: 10.57%
  • Retail (general): 2.44%
  • Retail (grocery and food): 1.44%
  • Retail (online): 4.57%\u00a0
  • Shoe: 10.48%
  • Software (entertainment): 20.53%
  • Software (internet): 2.07%
  • Software (system and application): 19.54%
  • Transportation: 3.79%

If you don\u2019t see your industry above, check the full list on the U.S. Margins by Sector page. You can also see the gross margin, operating margin, and other standard financial metrics for each sector.\u00a0

Ways to improve your profit margin.

You can increase profitability by raising revenue, reducing costs and expenses, or doing a combination of the two. Here are some tips to achieve your ideal profit margin:\u00a0

  • Reduce your overall operating costs: These include office space and utilities, materials, supplies, wages and benefits, employee spending, insurance, equipment repair, shipping, and business software. Try to negotiate a lower rate, downgrade, or eliminate any unnecessary services.
  • Cut underperforming products or services, or add higher-margin products or services: A break-even analysis can help you figure out whether a product is truly profitable. You can draw inspiration from other companies in your sector or dive into the research on high-margin products for your industry. In any case, you\u2019ll need to weigh the cost of goods sold and operating expenses against your desired selling price.\u00a0
  • Adjust your pricing strategy: Experiment with different product pricing methods like value-based pricing or cost-plus pricing. You may be surprised by how product pricing impacts demand.\u00a0
  • Build brand loyalty: Regularly engaging with your customers and showing customer appreciation has a tangible effect on sales and customer retention. Retaining more customers allows you to reduce your advertising costs.

What is a good profit margin? The bottom line.

Profit margin signals a lot about a business. It\u2019s a marker of your profitability, stability, and how attractive you are to investors. You can also use it to understand how you compare with the competition, and evaluate whether your business model is sustainable.

But if you aren\u2019t there right now, don\u2019t worry. Use the strategies above and consider contacting a financial advisor to receive one-on-one guidance.

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", + "page_last_modified": "" + }, + { + "page_name": "How to Analyze Corporate Profit Margins", + "page_url": "https://www.investopedia.com/articles/fundamental/04/042804.asp", + "page_snippet": "Understanding these three common measures of profitability can help you take a deeper look at a company's profit margin.Companies with high gross margins will have money left over to spend on other business operations, such as research and development or marketing. When analyzing corporate profit margins, look for downward trends in the gross margin rate over time. This is a telltale sign the company may have future problems with its bottom line. Based on the section above, Microsoft generated $198.27 billion of revenue in 2022. Looking further down its income statement, it also generated $135.6 billion of gross margin. Dividing Microsoft's gross margin by its total revenue yields roughly 68%; this means that for every dollar Microsoft generated in income, it paid roughly $0.32 for cost of goods sold and kept $0.68 to pay for broader operations. Looking further down the income statement, Microsoft also reported operating income of $83,383. This equals roughly 42% of net total sales. This means that after Microsoft paid for both its cost of goods sold and operating costs, it still kept $0.42 from every dollar it earned. Looking at Microsoft's financial information above, the company posted a 45.6% net income margin in 2020 and 52.8% net income margin in 2021. Therefore, though 37% may sound high, performing comparative margin analysis may reveal potential trends or downturns.", + "page_result": "\n\n\n\n\n\n\n\n\n\n\nHow to Analyze Corporate Profit Margins\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n\n\n\n\n\n
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Table of Contents\n
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Table of Contents\n\n\n
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  • Analyzing Corporate Margins
    • \n
  • Gross Profit Margin
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  • Operating Profit Margin
    • \n
  • Net Profit Margin
    • \n
  • Example of Margin Analysis
    • \n
  • FAQs
    • \n
  • The Bottom Line
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  • Investing
    • \n
  • Fundamental Analysis
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How to Analyze Corporate Profit Margins

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Ben McClure\n
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Updated May 29, 2023
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Let's face it, a company's most important goal is to make money and keep it, which depends on liquidity and efficiency. Because these characteristics determine a company's ability to pay investors a dividend, profitability is reflected in share price.\n

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That's why investors should know how to analyze various facets of profitability, including how efficiently a company uses its resources and how much income it generates from operations. Knowing how to calculate and analyze a corporate profit margin is a great way to gain insight into how well a company generates and retains money.\n

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Key Takeaways

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  • Investors who know how to calculate and analyze a corporate profit margin gain insight into a company's current effectiveness in generating profits and its potential to generate future profits.
  • The three key profit-margin ratios investors should analyze when evaluating a company are gross profit margins, operating profit margins, and net profit margins.
  • Companies with large profit margins frequently have a competitive advantage over other companies in their industry.
  • Understanding a company's margin ratios can be a starting point for further analysis to decide if a company would be a good investment option.
  • Profit margins also hold strong value when compared against competitor values or tracked over time for a single company.
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Analyzing Corporate Profit Margins Using Profit-Margin Ratios

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It's tempting to rely on net earnings alone to gauge profitability, but it doesn't always provide a clear picture of a company. Using it as the sole measure of profitability can be a bad idea.\n

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Profit-margin ratios, on the other hand, can give investors deeper insight into management efficiency. But instead of measuring how much a company earns from assets, equity, or invested capital, these ratios measure how much money a company squeezes from its total revenue or total sales.\n

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Margins are earnings expressed as a ratio or a percentage of sales. A percentage allows investors to compare the profitability of different companies, while net earnings, which are presented as an absolute number, don't.\n

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Financial ratios rarely hold value by themselves. You can get the most benefit from using financial ratios by comparing them over time, comparing them across companies, or by comparing them against industry benchmarks.

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Example of a Profit-Margin Ratio

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Suppose that Company A had an annual net income of $749 million on sales of about $11.5 billion last year. Its biggest competitor, Company B, earned about $990 million for the year on sales of about $19.9 billion. Comparing Company B's net earnings of $990 million to Company A's $749 million shows that Company B earned more than Company A, but it doesn't tell you very much about profitability.\n

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However, if you look at the net profit margin or the earnings generated from each dollar of sales, you'll see that Company A produced 6.5 cents on every dollar of sales, while Company B returned less than 5 cents.\n

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There are three key profit-margin ratios: gross profit margins, operating profit margins, and net profit margins.\n

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Gross Profit Margin\u00a0

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The gross profit margin tells us how much profit a company makes on its cost of sales, or cost of goods sold (COGS). In other words, it indicates how efficiently management uses labor and supplies in the production process. This is the formula:\n

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Gross Profit Margin = (Sales - Cost of Goods Sold)/Sales\n
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Suppose that a company has $1 million in sales and the cost of its labor and materials amounts to $600,000. Its gross margin rate would be 40% (($1 million - $600,000)/$1 million).\n

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Companies with high gross margins will have money left over to spend on other business operations, such as research and development or marketing. When analyzing corporate profit margins, look for downward trends in the gross margin rate over time. This is a telltale sign the company may have future problems with its bottom line.\n

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For example, companies frequently are faced with rapidly increasing labor and materials costs. Unless the company can pass these costs onto customers in the form of higher prices, these costs could lower the company's gross profit margins.\n

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It's important to remember that gross profit margins can vary drastically from business to business and from industry to industry. For example, the software industry has a gross margin of about 90%, while the airline industry only has a gross margin of about 5%.\n

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Operating Profit Margin

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By comparing earnings before interest and taxes (EBIT) to sales, operating profit margins show how successful a company's management has been at generating income from the operation of the business. This is the calculation:\n

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Operating Profit Margin = EBIT/Sales\n
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If EBIT amounted to $200,000 and sales equaled $1 million, the operating profit margin would be 20%.\n

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This ratio is a rough measure of the operating leverage a company can achieve in the operational part of its business. It indicates how much EBIT is generated per dollar of sales. High operating profits can mean the company has effective control of costs, or that sales are increasing faster than operating costs.\n

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Knowing operating profit also allows an investor to do profit-margin comparisons between companies that do not issue a separate disclosure of their cost of goods sold figures.\n

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Operating profit measures how much cash the business throws off, and some consider it a more reliable measure of profitability since it is harder to manipulate with accounting tricks than net earnings.\n

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Naturally, because the operating profit margin accounts for administration and selling costs as well as materials and labor, it should be a much smaller figure than the gross margin.\n

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Margins often get smaller as you work your way down a company's income statement. That is because the further down you go, the more expenses get added into the calculation (which reduces profits).

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Net Profit Margin\u00a0

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Net profit margins are those generated from all phases of a business, including taxes. In other words, this ratio compares net income with sales. It comes as close as possible to summing up in a single figure how effectively the managers are running a business:\n

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Net Profit Margins = Net Profits After Taxes/Sales\n
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If a company generates after-tax earnings of $100,000 on $1 million of sales, then its net margin amounts to 10%.\n

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To be comparable from company to company and from year to year, net profits after tax must be shown before minority interests have been deducted and equity income added. Not all companies have these items. Also, investment income, which is wholly dependent upon the whims of management, can change dramatically from year to year.\n

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Just like gross and operating profit margins, net margins vary between industries. By comparing a company's gross and net margins, we can get a good sense of its non-production and non-direct costs like administration, finance, and marketing costs.\n

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Examples of Corporate Margin Analysis

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As part of its annual financial statement reporting, Microsoft reported financial information for the year ending June 30, 2022. These comparative income statements also communicated historical results for the same period ending in 2021 and 2020.\n

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Based on the section above, Microsoft generated $198.27 billion of revenue in 2022. Looking further down its income statement, it also generated $135.6 billion of gross margin. Dividing Microsoft's gross margin by its total revenue yields roughly 68%; this means that for every dollar Microsoft generated in income, it paid roughly $0.32 for cost of goods sold and kept $0.68 to pay for broader operations.\n

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Looking further down the income statement, Microsoft also reported operating income of $83,383. This equals roughly 42% of net total sales. This means that after Microsoft paid for both its cost of goods sold and operating costs, it still kept $0.42 from every dollar it earned.\n

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Last, Microsoft paid income taxes and had several income statement lines that further reduced the amount of net income it earned. Rounding up, this left Microsoft with roughly 37% of its total gross revenue. This means that for every dollar that Microsoft sold, it ultimately kept $0.37 after factoring in costs.\n

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Consider that by itself, these margin ratios may not mean much. After all, you may not know if a 37% net income margin is good, especially considering Microsoft's size, industry, and competitive advantages. Therefore, margin ratios are a tremendous way to compare information across companies to see how one entity may be performing against its competitors.\n

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Last, consider the value profit margins may offer by comparing them over time. Looking at Microsoft's financial information above, the company posted a 45.6% net income margin in 2020 and 52.8% net income margin in 2021. Therefore, though 37% may sound high, performing comparative margin analysis may reveal potential trends or downturns.\n

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Why Are Corporate Profits Important?

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Corporate profits are important as they indicate a company's financial success, ability to reinvest, attract investors, and provide returns to shareholders. When a company has residual profit, it is more likely to be able to grow as it can use that capital to scale its business or perform research.

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How Do Taxes Impact Corporate Profits?

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Taxes can affect corporate profits by reducing the amount of income available for reinvestment or distribution to shareholders, depending on the tax rate and applicable deductions. Be aware that taxes are included at the bottom of a company's income statement, so taxes are excluded when calculating gross profit or operating profit.


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How Do Companies Distribute Their Profits?

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Companies can distribute their profits through dividends to shareholders, reinvestment in the business, share buybacks, or debt reduction. Companies can also hold onto profits for use in future years; this balance of equity is reported on a company's financial statements as the total amount of retained earnings.


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What Is a Good Profit Margin for a Company?

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A good profit margin for a company depends on the industry, but generally, higher profit margins indicate better profitability and efficiency. In addition, the benchmark for larger companies should be higher than that of small companies because of the economies of scale that can be achieved through more efficient manufacturing processes and stronger purchasing power.


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The Bottom Line

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Margin analysis is a great tool to understand the profitability of companies. It tells us how effective management can wring profits from sales, and how much room a company has to withstand a downturn, fend off competition, and make mistakes. But, like all ratios, margin ratios never offer perfect information. They are only as good as the timeliness and accuracy of the financial data that is fed into them. Correct analysis also depends on a consideration of the company's industry and its position in the business cycle.\n

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Margin ratios highlight companies that are worth further examination. Knowing that a company has a gross margin of 25% or a net profit margin of 5% tells us very little. As with any ratio used on its own, margins tell us a lot, but not the whole story, about a company's prospects.\n

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Article Sources
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Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our\neditorial policy.
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  1. Angelo Corelli. "Analytical Corporate Finance," Page 20. Springer International Publishing, 2018.

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  2. International Air Transport Association. "Airline Profitability Strengthens Further."

    3. \n
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Related Terms
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After-Tax Profit Margin: Definition, Formula, and Example\n
After-tax profit margin is a financial performance ratio calculated by dividing a company's net income by its net sales.
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Gross Profit: What It Is & How to Calculate It\n
Gross profit is the profit a company makes after deducting the costs of making and selling its products or the costs of its services.
\nmore
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Return on Equity (ROE) Calculation and What It Means\n
Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders' equity.
\nmore
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Profit Before Tax (PBT): Definition, Uses, and How To Calculate\n
Profit before tax is a measure that looks at a company's profits before the company has to pay income tax.
\nmore
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Cost of Goods Sold (COGS) Explained With Methods to Calculate It\n
Cost of goods sold (COGS) is defined as the direct costs attributable to the production of the goods sold in a company.
\nmore
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Gross Profit Margin: Formula and What It Tells You\n
The gross profit margin is a metric used to assess a firm's financial health and is equal to revenue less cost of goods sold as a percent of total revenue.
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\n\n\n\n\n\n\n\n\n\n", + "page_last_modified": "" + }, + { + "page_name": "What\u2019s a Good Profit Margin for a New Business?", + "page_url": "https://www.investopedia.com/articles/personal-finance/093015/whats-good-profit-margin-new-business.asp", + "page_snippet": "Surprisingly, the younger your company is, the better its numbers may look when it comes to your profit margin.The other most common type of profit margin used in the corporate world is the gross profit margin or the gross margin. It is calculated by subtracting the cost of goods sold (COGS) from a company's net sales. The result is then divided by its net sales. Like others, gross margins are commonly expressed as a percentage. Investors, analysts, and management can use gross margins to determine a company's financial health. Major shifts in gross margins may indicate that the company needs to make changes to the way it's being managed. Or it may signal that the company's products and services may need to be reviewed. Small business owners use the gross profit margin to measure the profitability of a single product. If you sell a product for $50 and it costs you $35 to make, your gross profit margin is 30% ($15 divided by $50). Gross margin is a good figure to know, but probably one to ignore when evaluating your business as a whole. A gross profit margin can be used to determine a particular item's profitability, but net profit margins are a better measure of overall profitability.", + "page_result": "\n\n\n\n\n\n\n\n\n\n\nWhat\u2019s a Good Profit Margin for a New Business?\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n\n\n\n\n\n
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Table of Contents\n
\n
Table of Contents\n\n\n
\n
  • What Is a Profit Margin?
    • \n
  • The Industry Makes a Difference
    • \n
  • New Company vs. Mature Company
    • \n
  • Profit Margin FAQs
    • \n
  • The Bottom Line
\n
  • Small Business
    • \n
  • How to Start a Business
\n

What\u2019s a Good Profit Margin for a New Business?

\n

\n
\n
\nBy\nTim Parker\n
\n
Updated October 30, 2022
\n
\n\n\nReviewed by\nMargaret James\n
\n
\n\n\nFact checked by\n
Timothy Li\n
\n
\n
\n\n\n
\n
\n\n\nFact checked by\nTimothy Li\n
\nFull Bio\n
\n
    \n
  • \n \n\n\n
    • \n
\n
\nTimothy Li is a consultant, accountant, and finance manager with an MBA from USC and over 15 years of corporate finance experience. Timothy has helped provide CEOs and CFOs with deep-dive analytics, providing beautiful stories behind the numbers, graphs, and financial models.\n
\n
\n
\nLearn about our \neditorial policies\n
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Trending Videos
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Starting and running a business can be very exciting. It takes a lot of hard work but it may be worth it after all is said and done. After all, you work for yourself, which means you don't have to answer to anyone (other than your customers) and are often able to set your own hours. If you play your cards right and you're able to launch a great idea, you'll be able to see the profits grow.\n

\n
\n

Although money isn't always everything, it's certainly a top priority for people who are first starting up in the business world. Sure, you can tell your vendors, investors, and loan officers that you want to make a difference in the world but there's a very good chance that they'll want to see more than just your good intentions. In fact, they'll probably be more interested in financial metrics, especially your profit margin.\n

\n
\n

If your business is new, there are several factors to consider before developing a sense of your ideal profit margin. We look at some of the basics of what you should consider when you're measuring profitability and studying your profit margings.\n

\n
\n

Key Takeaways

\n
  • Profit margins are financial metrics that are used to measure a business or company's profitability.
  • A gross profit margin can be used to determine a particular item's profitability, but net profit margins are a better measure of overall profitability.
  • The net profit margin is key as it measures total sales, less any business expenses, and then divides that number by total revenue.
  • The best net profit margin for your business depends on what industry you're business is in, which means you shouldn't compare your margins to companies in other industries.
  • Newer companies may have better profit margins than older ones because manufacturing costs increase while sales increase.
\n

What Is a Profit Margin?

\n

Before we do anything else, let's do a refresher on profit margins. The profit margin is among the most common profitability ratios that show how businesses make money. Put simply, the profit margin represents the total percentage of sales that result in a profit. Keep in mind, that you have to subtract all the expenses that go into running the business in order to get the resulting profits. A company's profit margin tells interested parties (investors, creditors, and others) how well handles its money.\n

\n
\n

There are several types of profit margins. But here, we'll look at two of the most common: the net profit margin and the gross profit margin.\n

\n
\n

Net Profit Margin

\n

A company's net profit margin is commonly simply called the net margin. This margin measures profit (or net income) as a total percentage of revenue. Like other margins, net profit margins are expressed as a percentage. But in some cases, you may see them reported in decimal form.\n

\n
\n

Here's how you figure out the net margin for a business. Take the company's total sales and subtract the total business expenses incurred. Divide the result by the company's total revenue. So if your new business brought in $300,000 last year and had expenses of $250,000, your net profit margin is 16%.\n

\n
\n

Net margins allow companies (and others) to see how well their business models are working and to measure their overall profitability. They are also used to help devise profit forecasts, which is especially useful for individuals who invest in public companies.\n

\n
\n

Gross Profit Margin

\n

The other most common type of profit margin used in the corporate world is the gross profit margin or the gross margin. It is calculated by subtracting the cost of goods sold (COGS) from a company's net sales. The result is then divided by its net sales. Like others, gross margins are commonly expressed as a percentage.\n

\n
\n

Investors, analysts, and management can use gross margins to determine a company's financial health. Major shifts in gross margins may indicate that the company needs to make changes to the way it's being managed. Or it may signal that the company's products and services may need to be reviewed.\n

\n
\n

Small business owners use the gross profit margin to measure the profitability of a single product. If you sell a product for $50 and it costs you $35 to make, your gross profit margin is 30% ($15 divided by $50). Gross margin is a good figure to know, but probably one to ignore when evaluating your business as a whole.
\n

\n
\n

\n

Operating profit margin indicates the amount of profit a company makes per dollar after factoring in certain variable costs, such as labor and materials. But this metric doesn't factor in taxes or interest. In order to calculate operating margins, you should divide the total operating income by the company's net sales.

\n

The Industry Makes a Difference

\n

Profit margins are very dependent on the industry in which a business operates. Business owners make a higher margin in some sectors compared to others because of the economic factors of each industry. That's why it's important to keep the industry in mind (in addition to the business size) when you're comparing the profit margins of any company with others. Put simply, you have to make sure that you're making an apples-to-apples comparison.\n

\n
\n

Let\u2019s say you own a bakery and you make some of the best wedding cakes in town. You kept really good records and, after doing the math, came up with a net profit margin of 21%. But your friend owns an IT company that installs complicated computer networks for businesses and has a net profit margin of 16%. Does this mean you're a better business owner because your profit margin is five percentage points better? No. It doesn\u2019t work that way as the profit margin is industry-specific.\n

\n
\n

Similarly, you may expect margins of 19.8% as an accountant. If you\u2019re in the foodservice business, you might only see net margins of 3.8%. Does this mean you should sell your bakery and become an accountant? No. Profit margin doesn\u2019t measure how much money you will make or could make, only how much is actually made on each dollar of sales.\n

\n
\n

If you\u2019re a consultant, your margins are likely quite high since you have very little overhead. You can\u2019t compare yourself to a manufacturer who rents space and equipment and who must invest in raw materials.\n

\n
\n

\n

Net profit margins vary by sector and can't be compared across the board. By nature, industries in the financial services sector, such as accounting, have higher profit margins than industries in the foodservice sector, such as restaurants.

\n

Profit Margins of New vs. Established Companies

\n

Many new business owners generally expect a lower profit margin in the early years of their operations. It's not that they want to rake in lower profits. Rather, they believe that it takes time, effort, and a lot of money to start a business so making a profit may take some time.\n

\n
\n

Of course, when you begin earning a decent profit margin and how much you earn sometimes depends on your field. But in other cases,\u00a0that\u2019s surprisingly not true. Some businesses are prone to higher margins than others. Those with lower margins often have higher overhead and more expenses to pay. Consider business owners in the foodservice industry, which have to consider inventory, rent, utilities, and labor. But the goods and services they offer are often easier to sell.\n

\n
\n

In some cases, there's an inverse relationship between profit margins and sales. For instance, profit margins in the service and manufacturing industries decrease as sales increase. Businesses in these sectors may see a 40% margin until they hit around $300,000 in annual sales. That\u2019s about the time when the business has to start hiring more people. Each employee in a small business drives the margins lower.\n

\n
\n

What Is a Good Gross Profit Margin?

\n

There is no definitive answer to this question. That's because profit margins vary by industry and business size. Some sectors have, by nature, higher profit margins. This means that a high gross profit margin for a company in one industry may not be good for a company in another sector. High gross profit margins tend to be associated with manufacturing companies while those that buy and sell prepared goods, such as grocery stores, tend to have lower gross margins.

\n
\n
\n

What Is a Good Gross Profit Margin Ratio?

\n

A company's gross profit margin ratio compares the company's gross margin to its total revenue. It is expressed as a percentage. So if the ratio is 25%, that means that the company's gross profit margin is 25 cents for every dollar in sales.

Higher gross profit margin ratios generally mean that businesses do well at managing their sales costs. But there's no good way to determine what constitutes a good gross profit margin ratio. That's because some sectors tend to have higher ratios than others. So it's not a one-size-fits-all approach.

\n
\n
\n

What Are Good Gross Profit Margins for Various Major Industries?

\n

NYU's Stern Business School releases sector-related data on a regular basis. According to the school's margin report from January 2022, the average gross profit margin for education companies was 47.9%. Machinery companies saw gross margins of 35.4%, while real estate developers saw margins of 28.9%. Oilfield services and equipment companies saw gross margins of 7.9%, and air transport companies raked in gross margins of 1.4%. Financial services saw some of the highest, including regional banks at 99.8%.

\n
\n
\n

What Is a Good Profit Margin for a Small Business?

\n

The profit margin for small businesses depend on the size and nature of the business. But in general, a healthy profit margin for a small business tends to range anywhere between 7% to 10%. Keep in mind, though, that certain businesses may see lower margins, such as retail or food-related companies. That's because they tend to have higher overhead costs.

\n
\n
\n

The Bottom Line

\n

In the beginning, when a company is small and simple, margins will likely be quite impressive. You don\u2019t have a large workforce and other substantial overhead expenses. As your sales increase and your business grow, more money comes in. But your margins will likely shrink because you\u2019re probably hiring more people, investing in bigger facilities, and expanding your product line. Simply bringing in more cash doesn\u2019t mean you\u2019re making a bigger profit.\n

\n
\n

And as your business expands, continue to tend to its margins. Larger sales figures are great, but make sure you're earning maximum money on those sales.\n

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Article Sources
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Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our\neditorial policy.
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  1. Damodaran Online. "Margins by Sector (US)."

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Related Terms
\n
After-Tax Profit Margin: Definition, Formula, and Example\n
After-tax profit margin is a financial performance ratio calculated by dividing a company's net income by its net sales.
\nmore
\n
Gross Profit: What It Is & How to Calculate It\n
Gross profit is the profit a company makes after deducting the costs of making and selling its products or the costs of its services.
\nmore
\n
Gross Profit Margin: Formula and What It Tells You\n
The gross profit margin is a metric used to assess a firm's financial health and is equal to revenue less cost of goods sold as a percent of total revenue.
\nmore
\n
Pretax Profit Margin: Definition, Uses, Calculation, Example\n
The pretax profit margin is a financial accounting tool used to measure the operating efficiency of a company before deducting taxes.
\nmore
\n
What is Gross Income? Definition, Formula, Calculation, and Example\n
Gross income represents the total income from all sources, including returns, discounts, and allowances, before deducting any expenses or taxes.
\nmore
\n
Gross Margin: Definition, Example, Formula, and How to Calculate\n
Gross margin represents the amount of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services sold by the company.
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\n\n\n\n\n\n\n\n\n\n", + "page_last_modified": "" + }, + { + "page_name": "What\u2019s a Good Profit Margin for a New Business?", + "page_url": "https://www.investopedia.com/articles/personal-finance/093015/whats-good-profit-margin-new-business.asp", + "page_snippet": "Surprisingly, the younger your company is, the better its numbers may look when it comes to your profit margin.The other most common type of profit margin used in the corporate world is the gross profit margin or the gross margin. It is calculated by subtracting the cost of goods sold (COGS) from a company's net sales. The result is then divided by its net sales. Like others, gross margins are commonly expressed as a percentage. Investors, analysts, and management can use gross margins to determine a company's financial health. Major shifts in gross margins may indicate that the company needs to make changes to the way it's being managed. Or it may signal that the company's products and services may need to be reviewed. Small business owners use the gross profit margin to measure the profitability of a single product. If you sell a product for $50 and it costs you $35 to make, your gross profit margin is 30% ($15 divided by $50). Gross margin is a good figure to know, but probably one to ignore when evaluating your business as a whole. A gross profit margin can be used to determine a particular item's profitability, but net profit margins are a better measure of overall profitability.", + "page_result": "\n\n\n\n\n\n\n\n\n\n\nWhat\u2019s a Good Profit Margin for a New Business?\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n\n\n\n\n\n
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Table of Contents\n
\n
Table of Contents\n\n\n
\n
  • What Is a Profit Margin?
    • \n
  • The Industry Makes a Difference
    • \n
  • New Company vs. Mature Company
    • \n
  • Profit Margin FAQs
    • \n
  • The Bottom Line
\n
  • Small Business
    • \n
  • How to Start a Business
\n

What\u2019s a Good Profit Margin for a New Business?

\n

\n
\n
\nBy\nTim Parker\n
\n
Updated October 30, 2022
\n
\n\n\nReviewed by\nMargaret James\n
\n
\n\n\nFact checked by\n
Timothy Li\n
\n
\n
\n\n\n
\n
\n\n\nFact checked by\nTimothy Li\n
\nFull Bio\n
\n
    \n
  • \n \n\n\n
    • \n
\n
\nTimothy Li is a consultant, accountant, and finance manager with an MBA from USC and over 15 years of corporate finance experience. Timothy has helped provide CEOs and CFOs with deep-dive analytics, providing beautiful stories behind the numbers, graphs, and financial models.\n
\n
\n
\nLearn about our \neditorial policies\n
\n
\n
\n
\n
\n
\n\n\n
Trending Videos
\n
\n
\n

Starting and running a business can be very exciting. It takes a lot of hard work but it may be worth it after all is said and done. After all, you work for yourself, which means you don't have to answer to anyone (other than your customers) and are often able to set your own hours. If you play your cards right and you're able to launch a great idea, you'll be able to see the profits grow.\n

\n
\n

Although money isn't always everything, it's certainly a top priority for people who are first starting up in the business world. Sure, you can tell your vendors, investors, and loan officers that you want to make a difference in the world but there's a very good chance that they'll want to see more than just your good intentions. In fact, they'll probably be more interested in financial metrics, especially your profit margin.\n

\n
\n

If your business is new, there are several factors to consider before developing a sense of your ideal profit margin. We look at some of the basics of what you should consider when you're measuring profitability and studying your profit margings.\n

\n
\n

Key Takeaways

\n
  • Profit margins are financial metrics that are used to measure a business or company's profitability.
  • A gross profit margin can be used to determine a particular item's profitability, but net profit margins are a better measure of overall profitability.
  • The net profit margin is key as it measures total sales, less any business expenses, and then divides that number by total revenue.
  • The best net profit margin for your business depends on what industry you're business is in, which means you shouldn't compare your margins to companies in other industries.
  • Newer companies may have better profit margins than older ones because manufacturing costs increase while sales increase.
\n

What Is a Profit Margin?

\n

Before we do anything else, let's do a refresher on profit margins. The profit margin is among the most common profitability ratios that show how businesses make money. Put simply, the profit margin represents the total percentage of sales that result in a profit. Keep in mind, that you have to subtract all the expenses that go into running the business in order to get the resulting profits. A company's profit margin tells interested parties (investors, creditors, and others) how well handles its money.\n

\n
\n

There are several types of profit margins. But here, we'll look at two of the most common: the net profit margin and the gross profit margin.\n

\n
\n

Net Profit Margin

\n

A company's net profit margin is commonly simply called the net margin. This margin measures profit (or net income) as a total percentage of revenue. Like other margins, net profit margins are expressed as a percentage. But in some cases, you may see them reported in decimal form.\n

\n
\n

Here's how you figure out the net margin for a business. Take the company's total sales and subtract the total business expenses incurred. Divide the result by the company's total revenue. So if your new business brought in $300,000 last year and had expenses of $250,000, your net profit margin is 16%.\n

\n
\n

Net margins allow companies (and others) to see how well their business models are working and to measure their overall profitability. They are also used to help devise profit forecasts, which is especially useful for individuals who invest in public companies.\n

\n
\n

Gross Profit Margin

\n

The other most common type of profit margin used in the corporate world is the gross profit margin or the gross margin. It is calculated by subtracting the cost of goods sold (COGS) from a company's net sales. The result is then divided by its net sales. Like others, gross margins are commonly expressed as a percentage.\n

\n
\n

Investors, analysts, and management can use gross margins to determine a company's financial health. Major shifts in gross margins may indicate that the company needs to make changes to the way it's being managed. Or it may signal that the company's products and services may need to be reviewed.\n

\n
\n

Small business owners use the gross profit margin to measure the profitability of a single product. If you sell a product for $50 and it costs you $35 to make, your gross profit margin is 30% ($15 divided by $50). Gross margin is a good figure to know, but probably one to ignore when evaluating your business as a whole.
\n

\n
\n

\n

Operating profit margin indicates the amount of profit a company makes per dollar after factoring in certain variable costs, such as labor and materials. But this metric doesn't factor in taxes or interest. In order to calculate operating margins, you should divide the total operating income by the company's net sales.

\n

The Industry Makes a Difference

\n

Profit margins are very dependent on the industry in which a business operates. Business owners make a higher margin in some sectors compared to others because of the economic factors of each industry. That's why it's important to keep the industry in mind (in addition to the business size) when you're comparing the profit margins of any company with others. Put simply, you have to make sure that you're making an apples-to-apples comparison.\n

\n
\n

Let\u2019s say you own a bakery and you make some of the best wedding cakes in town. You kept really good records and, after doing the math, came up with a net profit margin of 21%. But your friend owns an IT company that installs complicated computer networks for businesses and has a net profit margin of 16%. Does this mean you're a better business owner because your profit margin is five percentage points better? No. It doesn\u2019t work that way as the profit margin is industry-specific.\n

\n
\n

Similarly, you may expect margins of 19.8% as an accountant. If you\u2019re in the foodservice business, you might only see net margins of 3.8%. Does this mean you should sell your bakery and become an accountant? No. Profit margin doesn\u2019t measure how much money you will make or could make, only how much is actually made on each dollar of sales.\n

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If you\u2019re a consultant, your margins are likely quite high since you have very little overhead. You can\u2019t compare yourself to a manufacturer who rents space and equipment and who must invest in raw materials.\n

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Net profit margins vary by sector and can't be compared across the board. By nature, industries in the financial services sector, such as accounting, have higher profit margins than industries in the foodservice sector, such as restaurants.

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Profit Margins of New vs. Established Companies

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Many new business owners generally expect a lower profit margin in the early years of their operations. It's not that they want to rake in lower profits. Rather, they believe that it takes time, effort, and a lot of money to start a business so making a profit may take some time.\n

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Of course, when you begin earning a decent profit margin and how much you earn sometimes depends on your field. But in other cases,\u00a0that\u2019s surprisingly not true. Some businesses are prone to higher margins than others. Those with lower margins often have higher overhead and more expenses to pay. Consider business owners in the foodservice industry, which have to consider inventory, rent, utilities, and labor. But the goods and services they offer are often easier to sell.\n

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In some cases, there's an inverse relationship between profit margins and sales. For instance, profit margins in the service and manufacturing industries decrease as sales increase. Businesses in these sectors may see a 40% margin until they hit around $300,000 in annual sales. That\u2019s about the time when the business has to start hiring more people. Each employee in a small business drives the margins lower.\n

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What Is a Good Gross Profit Margin?

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There is no definitive answer to this question. That's because profit margins vary by industry and business size. Some sectors have, by nature, higher profit margins. This means that a high gross profit margin for a company in one industry may not be good for a company in another sector. High gross profit margins tend to be associated with manufacturing companies while those that buy and sell prepared goods, such as grocery stores, tend to have lower gross margins.

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What Is a Good Gross Profit Margin Ratio?

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A company's gross profit margin ratio compares the company's gross margin to its total revenue. It is expressed as a percentage. So if the ratio is 25%, that means that the company's gross profit margin is 25 cents for every dollar in sales.

Higher gross profit margin ratios generally mean that businesses do well at managing their sales costs. But there's no good way to determine what constitutes a good gross profit margin ratio. That's because some sectors tend to have higher ratios than others. So it's not a one-size-fits-all approach.

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What Are Good Gross Profit Margins for Various Major Industries?

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NYU's Stern Business School releases sector-related data on a regular basis. According to the school's margin report from January 2022, the average gross profit margin for education companies was 47.9%. Machinery companies saw gross margins of 35.4%, while real estate developers saw margins of 28.9%. Oilfield services and equipment companies saw gross margins of 7.9%, and air transport companies raked in gross margins of 1.4%. Financial services saw some of the highest, including regional banks at 99.8%.

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What Is a Good Profit Margin for a Small Business?

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The profit margin for small businesses depend on the size and nature of the business. But in general, a healthy profit margin for a small business tends to range anywhere between 7% to 10%. Keep in mind, though, that certain businesses may see lower margins, such as retail or food-related companies. That's because they tend to have higher overhead costs.

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The Bottom Line

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In the beginning, when a company is small and simple, margins will likely be quite impressive. You don\u2019t have a large workforce and other substantial overhead expenses. As your sales increase and your business grow, more money comes in. But your margins will likely shrink because you\u2019re probably hiring more people, investing in bigger facilities, and expanding your product line. Simply bringing in more cash doesn\u2019t mean you\u2019re making a bigger profit.\n

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And as your business expands, continue to tend to its margins. Larger sales figures are great, but make sure you're earning maximum money on those sales.\n

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Article Sources
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  1. Damodaran Online. "Margins by Sector (US)."

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Related Terms
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After-Tax Profit Margin: Definition, Formula, and Example\n
After-tax profit margin is a financial performance ratio calculated by dividing a company's net income by its net sales.
\nmore
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Gross Profit: What It Is & How to Calculate It\n
Gross profit is the profit a company makes after deducting the costs of making and selling its products or the costs of its services.
\nmore
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Gross Profit Margin: Formula and What It Tells You\n
The gross profit margin is a metric used to assess a firm's financial health and is equal to revenue less cost of goods sold as a percent of total revenue.
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Pretax Profit Margin: Definition, Uses, Calculation, Example\n
The pretax profit margin is a financial accounting tool used to measure the operating efficiency of a company before deducting taxes.
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What is Gross Income? Definition, Formula, Calculation, and Example\n
Gross income represents the total income from all sources, including returns, discounts, and allowances, before deducting any expenses or taxes.
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Gross Margin: Definition, Example, Formula, and How to Calculate\n
Gross margin represents the amount of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services sold by the company.
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\n\n\n\n\n\n\n\n\n\n", + "page_last_modified": "" + }, + { + "page_name": "The Public Thinks the Average Company Makes a 36% Profit Margin, ...", + "page_url": "https://www.aei.org/carpe-diem/the-public-thinks-the-average-company-makes-a-36-profit-margin-which-is-about-5x-too-high/", + "page_snippet": "I find this totally fascinating, though not completely unexpected. When a random sample of American adults were asked the question \u201cJust a rough guess, what percent profit on each dollar of sales do you think the average company makes after taxes?\u201d for the Reason-Rupe poll in May 2013, ...I find this totally fascinating, though not completely unexpected. When a random sample of American adults were asked the question \u201cJust a rough guess, what percent profit on each dollar of sales do you think the average company makes after taxes?\u201d for the Reason-Rupe poll in May 2013, the average response was 36%! That response [\u2026]", + "page_result": "\n\n\n\n\n\n\n\n\n\n\tThe Public Thinks the Average Company Makes a 36% Profit Margin, Which Is About 5X Too High | American Enterprise Institute - AEI\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n \n\n\n\n\n\n\n\n\n\n\n
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The Public Thinks the Average Company Makes a 36% Profit Margin, Which Is About 5X Too High

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By Mark J. Perry

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AEIdeas

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April 02, 2015

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I find this totally fascinating, though not completely unexpected. When a random sample of American adults were asked the question “Just a rough guess, what percent profit on each dollar of sales do you think the average company makes after taxes?” for the Reason-Rupe poll in May 2013, the average response was 36%! That response was very close to historical results from the polling organization ORC’s polls for a slightly different, but related question: What percent profit on each dollar of sales do you think the average manufacturer makes after taxes? Responses to that question in 9 different polls between 1971 and 1987 ranged from 28% to 37% and averaged 31.6%.

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How do the public’s estimates of corporate profit margins compare to reality? Not surprisingly they are off by a huge margin. According to this Yahoo!Finance database for 212 different industries, the average profit margin for the most recent quarter was 7.5% and the median profit margin was 6.5% (see chart above). Interestingly, there wasn’t a single industry out of 212 that had a profit margin as high as 36% in the most recent quarter. The industry “REIT-Diversified” had the highest profit margin at 33.5% followed by just one other industry – Wireless Communications\u00a0 at 30.9% – with a profit margin higher than 30%.

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“Big Oil” companies (Major Integrated Oil and Gas) make a lot of profits, right? Well, that industry had a below-average profit margin of 5.1% in the most recent quarter. And evil Walmart only made a 3.1% profit margin in the most recent quarter (as I reported recently), which is less than half of the almost 7% average government take on retails sales in the form of state and local sales taxes. Think about it – for every $100 in sales for Walmart, the state/local governments get an average of $6.88 in sales taxes (and as much $9.44 in Tennessee and $9.16 in Arizona, see data here), while Walmart gets only $3.10 in profits!

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Bottom Line: The public’s complete overestimation of how much companies earn in profits as a share of sales explains a lot. If $36 of every $100 in sales at a company like Walmart, McDonald’s, Home Depot, Ford Motor Company or a local dry cleaner or restaurant really did turn into profits, then of course those companies could afford to pay unrealistic living wages of $15 per hour, accept unreasonable demands from labor unions, provide all sorts of generous fringe benefits including weeks of paid holidays, long paid maternity leaves, and gold-plated pension programs, etc. The public that believes in the fantasy-world of sky-high 36% profit margins would naturally think companies are just being greedy and stingy when they don’t pay higher “living wages” and have to be forced to do so through minimum wage, or living wage, legislation.

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If the average person could realize that a 36% profit margin isn’t even close to reality, and that the typical, median firm has a profit margin of only 6.5%, or almost 30 percentage points below what the public thinks is a normal profit margin, then hopefully the average person would become a little more realistic about how the business world operates. Companies aren’t being stingy when they pay competitive wages, they’re just trying to survive on what are sometimes razor-thin profit margins, in a competitive environment where there’s not a large margin of error. If they’re not operating efficiently and watching costs very carefully, it’s pretty easy for a business to go from a 6.5% profit margin to a 0% break-even situation, and then to losses and bankruptcy — just look at the more than half a million businesses that fail every year.

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