The profit margin formula
Every profit margin is a profit figure divided by revenue; the three common margins differ only in which profit you use.[1][2]
| Margin | Profit in the numerator | Example |
|---|---|---|
| Gross profit margin | Revenue − cost of goods sold | 45.0% |
| Operating profit margin | Gross profit − operating expenses | 12.5% |
| Net profit margin | Operating profit − interest − taxes ± other items | 11.3% |
Step 1: Find revenue
Use net sales: gross sales minus returns, refunds, allowances and discounts. Leave out sales tax you collected, because it is owed to the state, and any money that is not from selling your goods or services, such as a loan. In the example the shop's net sales for the year were $240,000.
Step 2: Calculate gross profit margin
Subtract cost of goods sold from revenue, then divide by revenue. For a reseller, cost of goods sold is opening inventory plus purchases (including freight to get them in), minus closing inventory; makers add materials, direct labor and production overhead.[3]
$240,000 − $132,000 = $108,000 of gross profit. $108,000 ÷ $240,000 = 45.0% gross margin.
Use the gross margin calculator to blend several product lines, or the profit margin calculator for a single item.
Step 3: Calculate operating profit margin
Subtract operating expenses, the costs of running the business that are not part of the product: wages outside production, rent, software, advertising, marketplace and payment fees, and depreciation. $108,000 − $72,000 − $6,000 = $30,000 of operating profit, a 12.5% operating margin.
Step 4: Calculate net profit margin
Subtract interest and income tax and add or subtract any other non-operating items. This shop paid $3,000 of loan interest, leaving $27,000, a 11.3% net margin. A sole proprietor's business pays no income tax of its own; the profit flows to the owner's return through Schedule C, so the business-level net margin is a pre-tax figure.[4] The net profit margin calculator runs all four steps at once and lets you enter a tax rate.
CheckGross 45.0% → operating 12.5% → net 11.3%. Each margin is smaller than the one before because more costs have been subtracted. If a lower line shows a larger margin, look for other income or a sign error.
Average profit margin by industry
Average margins vary widely by industry; in Aswath Damodaran's January 2026 dataset for U.S. public companies, net margins ranged from below zero to above 20%.[5]
| Industry | Gross | Operating | Net |
|---|---|---|---|
| Retail (General) | 33.2% | 6.8% | 5.6% |
| Retail (Grocery and Food) | 26.3% | 2.3% | 1.3% |
| Retail (Special Lines) | 35.3% | 7.7% | 5.2% |
| Retail (Automotive) | 22.0% | 6.2% | 3.4% |
| Retail (Building Supply) | 34.2% | 11.9% | 7.8% |
| Retail (Distributors) | 30.6% | 10.1% | 6.1% |
| Restaurant/Dining | 32.2% | 15.8% | 9.4% |
| Apparel | 56.9% | 9.1% | 3.9% |
| Shoe | 43.9% | 9.0% | 6.3% |
| Household Products | 51.0% | 18.6% | 11.7% |
| Food Processing | 23.2% | 10.6% | 2.8% |
| Food Wholesalers | 15.4% | 2.6% | 1.2% |
| Beverage (Soft) | 54.7% | 20.5% | 13.4% |
| Beverage (Alcoholic) | 47.0% | 22.8% | 0.6% |
| Business & Consumer Services | 33.4% | 12.3% | 7.0% |
| Computer Services | 24.3% | 7.4% | 4.5% |
| Software (System & Application) | 71.7% | 33.0% | 25.5% |
| Software (Internet) | 62.6% | 3.7% | -0.9% |
| Advertising | 36.2% | 10.1% | -0.3% |
| Construction Supplies | 25.5% | 15.2% | 10.8% |
| Engineering/Construction | 15.5% | 6.5% | 5.9% |
| Homebuilding | 22.7% | 12.6% | 9.5% |
| Hotel/Gaming | 60.9% | 19.4% | 10.4% |
| Recreation | 39.8% | 9.7% | -4.7% |
| Education | 45.8% | 14.0% | 8.8% |
| Transportation | 24.1% | 7.6% | 8.2% |
| Trucking | 21.2% | 6.9% | 3.8% |
| Auto Parts | 15.8% | 5.7% | 0.7% |
| Furn/Home Furnishings | 30.3% | 6.6% | 1.1% |
| Healthcare Support Services | 12.1% | 3.0% | 1.3% |
These are large listed companies. For small retailers, the Census Bureau's Annual Retail Trade Survey gives gross margins by kind of business, reproduced on the gross margin calculator page.[6]
What is a good profit margin?
A good profit margin is one that is at or above the norm for businesses like yours and that pays the owner a fair wage plus a return on the money invested. A 5% net margin is healthy for a high-volume grocery business and weak for a software company. Three checks help:
- Compare with your industry, using the table above or trade-association data.
- Compare with your own past periods. A falling gross margin points to pricing or supplier costs; a falling net margin with a steady gross margin points to overhead.
- Check break-even. The break-even calculator shows how far sales can fall before the margin turns into a loss.
Common mistakes when calculating profit margin
- Dividing by cost instead of revenue. That gives markup, not margin; see margin vs markup.
- Mixing periods. Use the same month, quarter or year for revenue and every cost.
- Leaving out fees. Card processing and marketplace commissions are real costs; the eBay and Etsy fee calculators show them per sale.
- Averaging margins. Add up the profits and the revenues first, then divide.
Frequently asked questions
What is the formula for profit margin?
Profit margin = profit ÷ revenue × 100. Use gross profit for gross margin, operating profit for operating margin and net income for net margin.
How do I calculate profit margin in Excel or Google Sheets?
With revenue in A2 and cost in B2, enter =(A2-B2)/A2 and format the cell as a percentage.
What is a good profit margin for a small business?
It depends on the industry. Compare your net margin with similar businesses and with your own past results rather than with one universal number.
Is profit margin calculated before or after tax?
Gross and operating margins are before tax. Net profit margin is after tax for a corporation; for a sole proprietorship, the business-level figure is before the owner's income tax.
Why is my net margin so much lower than my gross margin?
Because operating expenses, interest and taxes are paid out of gross profit. The gap shows how much overhead the business carries.
Sources
- Principles of Accounting, Volume 1: Financial Accounting, Chapter 6 key terms (gross margin, gross profit margin ratio)
- Variable definitions: net margin, pre-tax operating margin
- Publication 334, Tax Guide for Small Business (chapters 6 and 7: cost of goods sold and gross profit)
- Instructions for Schedule C (Form 1040), Profit or Loss From Business
- Operating and Net Margins by Industry (US), data as of January 2026
- Annual Retail Trade Survey: 2022 (benchmarked), gross margin as a percentage of sales by kind of business