Profit margin is the amount by which revenue from sales exceeds costs in a business, usually expressed as a percentage. It can also be calculated as net income divided by revenue or net profit divided by sales. For instance, a 30% profit margin means there is $30 of net income for every $100 of revenue.

Types of Profit Margins

1. Gross Profit Margin – Measures profitability after accounting for the cost of goods sold (COGS).

2. Operating Profit Margin – Reflects earnings after operating expenses.

3. Net Profit Margin – The most comprehensive metric, including all expenses, taxes, and interest.

Why Profit Margin Matters

• Financial Health Indicator – A declining profit margin may signal rising costs or falling sales efficiency.

• Business Efficiency Measure – It answers the question: how much profit is earned per dollar of revenue?

• Competitive Benchmarking – Helps compare performance against similar companies (must compare within the same industry and scale).

How to Improve Profit Margin

• Increase Revenue – Raise prices, upsell, or expand market reach.

• Reduce Costs – Optimize supply chains, negotiate with suppliers, or cut unnecessary expenses.

• Enhance Operational Efficiency – Automate processes, reduce waste, or improve productivity.