The three margins and what each reveals
Margin is profit expressed as a share of revenue. Businesses track three, each stripping out a further layer of cost, and each answering a different question.
Gross margin
Revenue minus the direct cost of producing what you sold. It answers: is the product itself profitable? A weak gross margin cannot be fixed by cutting overheads — the unit economics are wrong.
Operating margin
Also called EBIT margin. It answers: is the business, as run, profitable? This is the number most useful for comparing competitors, because it excludes financing and tax choices.
Net margin
What actually reaches the owners. It answers: what did we keep? Two identical businesses can show very different net margins purely because one carries debt.
A worked example
The corresponding markup on cost is 66.67% — a different number describing the same transaction.
Margin is not markup
This confusion costs real money. Margin is profit as a share of the selling price. Markup is profit as a share of the cost. Same profit, different denominator, very different number.
An item costing $60 sold at $100 has a 40% margin but a 66.67% markup. A business owner who applies a "40% markup" thinking they are getting a 40% margin will price at $84 and take a 28.6% margin instead — losing $16 per unit.
| Markup | Resulting margin |
|---|---|
| 10% | 9.1% |
| 25% | 20.0% |
| 33.3% | 25.0% |
| 50% | 33.3% |
| 66.7% | 40.0% |
| 100% | 50.0% |
| 150% | 60.0% |
| 300% | 75.0% |
Markup = Margin ÷ (100 − Margin) × 100
The dedicated markup calculator converts between the two directly.
Typical margins by industry
| Industry | Typical net margin |
|---|---|
| Software / SaaS | 15% – 30% |
| Pharmaceuticals | 15% – 25% |
| Banking | 15% – 25% |
| Professional services | 10% – 20% |
| Manufacturing | 5% – 12% |
| Restaurants | 3% – 8% |
| Construction | 3% – 7% |
| Grocery retail | 1% – 3% |
| Airlines | 2% – 6% |
Frequently asked questions
What is a good profit margin?
It depends entirely on the industry. A 5% net margin is strong in grocery retail and weak in software. Compare against direct competitors, not across sectors.
As a general benchmark across the economy, a 10% net margin is considered healthy and 20% is strong.
What is the difference between margin and markup?
Margin is profit as a percentage of the selling price; markup is profit as a percentage of cost. An item costing $60 sold at $100 has a 40% margin and a 66.67% markup.
Confusing the two is the most common pricing error in small businesses, and it always errs toward underpricing.
How do I increase my profit margin?
Four levers: raise prices, reduce cost of goods, cut operating expenses, or shift the sales mix toward higher-margin products.
Price is usually the most powerful and the least used. A 5% price rise on a 20% margin business raises profit by 25% if volume holds.
Should I use gross or net margin to price my products?
Gross margin, because it reflects the economics of the product itself. You need gross margin high enough to cover operating expenses and still leave profit.
Net margin is a business-level result, not a pricing input.