Profit Margin
Profit as a percentage of revenue.
Formula
Variables
Example
$2000 profit on $5000 revenue is a 40% margin.
How it works
Profit margin tells you how much of each dollar of sales is left over as profit after costs are paid. It works by comparing net profit to total revenue, then converting that fraction into a percentage so it is easy to compare businesses of different sizes. A higher margin means a larger share of sales is being kept as profit.
When to use it
Use this when you want to judge how efficiently a business turns sales into profit, such as in retail, services, or product pricing. It is also useful for comparing two companies or tracking whether a business is becoming more or less profitable over time.
Worked example, step by step
A small shop makes $750 net profit from $3000 in revenue. Margin = Profit / Revenue × 100% Margin = 750 / 3000 × 100% Margin = 0.25 × 100% Margin = 25% So, the profit margin is 25%.
Common mistakes to avoid
- Using gross profit instead of net profit when the formula calls for net profit
- Dividing by profit instead of revenue
- Forgetting to multiply by 100% to convert the decimal into a percentage
Did You Know?
Grocery stores run on razor-thin margins near 2%, while luxury brands can exceed 60%.
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