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What is profit margin?

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Quick answer

Profit margin is the percentage of revenue a business keeps as profit after costs. It shows how efficiently a company turns sales into actual earnings — a higher margin means more profit from each unit of revenue. Profit margin = profit ÷ revenue, as a percentage.

Key things to understand

  1. Profit margin = profit ÷ revenue, as a percentage.
  2. 'Gross margin' counts only direct costs; 'net margin' counts all costs.
  3. Higher margins mean more efficient, profitable operations.
  4. Margins vary hugely by industry (software high, groceries low).

People also ask

How do you calculate profit margin?
Divide profit by revenue and multiply by 100 to get a percentage.
What's a good profit margin?
It depends on the industry; software can exceed 70%, while retail may be under 5%.
What's the difference between gross and net margin?
Gross margin counts only direct costs; net margin subtracts all expenses, including overhead and tax.