Profit margin measures how much of every pound of revenue a business keeps as profit. It is one of the most important indicators of business health and pricing efficiency.
Three types of profit margin
Gross profit margin:
Gross margin % = (Revenue − COGS) / Revenue × 100
Operating profit margin (EBIT margin):
Operating margin % = Operating profit / Revenue × 100
Net profit margin:
Net margin % = Net profit / Revenue × 100
Margin vs markup - the key difference
| Concept | Formula | Example (cost £60, price £100) |
|---|---|---|
| Margin | (Price − Cost) ÷ Price | (£100 − £60) ÷ £100 = 40% |
| Markup | (Price − Cost) ÷ Cost | (£100 − £60) ÷ £60 = 66.7% |
A 40% margin ≠ 40% markup. Always specify which you're using.
Setting your price from a target margin
Selling price = Cost / (1 − target margin)
Example: cost £60, target 40% margin → price = £60 ÷ 0.60 = £100
Typical profit margins by industry
| Industry | Gross margin | Net margin |
|---|---|---|
| SaaS / software | 70–85% | 10–25% |
| Retail | 30–50% | 2–5% |
| Food & beverage | 60–70% | 3–9% |
| Professional services | 40–60% | 10–20% |
| Construction | 15–25% | 2–8% |