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Net, Gross, & Operating Profit Margins: What Is High?

Two popular metrics commonly used to gauge the success of a business are profit margin and net profit. And, while net profit is great at reflecting how much profit is generated from revenue, for some applications, it’s arguable that a business's profit margin is a more valuable metric. This is because profit margin allows you to gauge how efficiently your business is running overall. To help you better understand these metrics and break down everything involving income, revenue, and profit, take a moment to read through this post. Difference Between Net, Gross, & Operating Profit Margins Net profit margin, gross profit margin, and operating profit margin are three metrics commonly used to analyze and measure the income of a business. To help you better understand the differences between them, consider these definitions and demonstrations of how each is calculated: Net Profit Margin Net profit margin is a measure of profitability. It's calculated by determining a business’s net profit as a percentage of revenue. The net profit margin formula looks like this: [(revenue-cost)/revenue] x 100 What’s considered a “good profit margin” will vary depending on industry and business size. A rule of thumb is that a 10% profit margin is average, a 5% profit margin is “low”, and a 20% profit margin is "good" or "high". Anything over 20% is exceptionally good. The average net profit margin can vary drastically by industry. For example: IndustryAverageHighAdvertising3.10%5%+Brokerage and Investment20.34%30%+ Another way to look at net profit margin is by using a net profit margin ratio. The net profit margin ratio is just another way to measure a company's profitability. It's calculated by dividing net income by revenue. This ratio tells you how much profit a company makes on each dollar of sales. Simply put, a high net profit margin ratio means that the company is making a lot of money on its sales. While a low net profit margin ratio means that the company is not making as much money on its sales. Gross Profit Margin The gross profit margin differs from the gross profit and is expressed as a percentage. It's calculated by determining the difference between revenue and the cost of goods sold (COGS), divided by the revenue. The gross profit margin formula looks like this: [(revenue-COGS)/revenue] x 100 Gross profit margin is the percentage of revenue that remains after paying COGS. This calculation is useful because it measures the efficiency of the business's operations and provides a benchmark for measuring other business expenses. For example, if you find your gross profit margin is low, you can look into reducing COGS, including reducing shipping costs or cutting out unnecessary expenses like excess staff or unneeded operation costs. Once again, gross profit margin can vary by industry. The overall average sits at 36.22% for all industries. However, each sector has its own specific numbers: IndustryAverageHighAdvertising23.99%30%+Apparel49.77%55%+Online Retail42.53%50%+Software58.58%65%+Transportation19.91%25%+ » Need help managing your expenses? Keep track of your e-commerce business expenses and calculate COGS for your Shopify store Operating Profit Margin Operating profit margin (or return on sales) is the ratio of operating income to net sales. This is usually expressed as a percentage. The operating profit margin formula looks like this: (operating profit/net sales) x 100 The operating profit margin ratio is used to determine how well a company can cover its operating costs with revenues. In other words, how effective a company is at generating profits from its sales. This is a useful performance indicator when making comparisons to similar companies. Average operating profit margins can also vary according to industry and business size. Apple, one of the world’s biggest software companies, maintained an operating margin of around 24-26% between 2018 to 2021. Other examples include: IndustryAverageHighAdvertising12.2%15%+Online Retail8.67%15%+ Good Profit Margins by Industry Each industry considers different percentages of profit margin to be either good or bad. If you're wanting to know what a good profit margin is for products in e-commerce, retail, and more, here’s an industry-specific look: Retail: 20-45%E-commerce: 15-20%Clothing: 4-13%Wholesale: 15-20%Hospitality: 10-15%Consulting: 80-100%Software: 70-85% Benefits of Knowing Your Profit Margins The ultimate goal for a business is profitability. If your sales are up, but your margins are down, you may need to take a deeper look at how you're running your business. A business with a good profit margin is able to remain afloat during tough times and capitalize on opportunities, such as seasonal strategies for boosting sales. A high profit margin means that the company is making enough money on each sale to cover its costs and generate positive ROI for continued growth. A high profit margin also sends a positive signal to potential investors, lending credibility and stability to the business. Ultimately, a good profit margin is essential for maximizing company growth and achieving long-term success. Limitations of Profit Margin Calculations To calculate a profit margin, business owners need to calculate total revenue and total expenses. This can be complex. R&D costs are expensed in the year in which they occur, while depreciation expenses are spread out over the life of the asset. Profit margins also don’t always consider changes in sales volume. If a company doubles its sales volume but keeps costs constant, the profit margin doesn’t change. If a company reduces its sales but also lowers expenses and increases prices, its profit margin will increase. Calculating profit margins is not an exact science. The outputs, while helpful, should be considered an estimation. » Need help calculating your profit? Make sure to avoid these mistakes and invest in a profit calculator