Profit Margin
The percentage of revenue that remains as profit after accounting for costs.
Definition
Profit margin expresses profit as a percentage of revenue, showing how much of each sales dollar becomes profit. There are several types: gross margin (revenue minus direct costs), operating margin (after operating expenses), and net margin (after all expenses including taxes).
For example, if you charge $1,000 for a service that costs $600 to deliver, your gross margin is 40% ($400/$1,000). Understanding margins at different levels helps identify where money is made and lost in your business.
Why It Matters
Profit margins determine business viability and growth potential. Low margins mean less buffer for unexpected costs or downturns. Healthy margins provide resources for investment, reserves, and owner compensation. Tracking margins over time reveals whether efficiency is improving or eroding.
Margin analysis guides pricing decisions. If your margin on a service is too thin, you might raise prices, reduce delivery costs, or discontinue the offering. Conversely, high-margin services might justify additional investment.
Examples
- 1
A consulting firm targets 50% gross margin—a $5,000 project should cost no more than $2,500 in labor and expenses to deliver.
- 2
A retailer operates on 25% gross margin, requiring $4 million in sales to generate $1 million gross profit.
- 3
An analysis reveals Service A has 60% margin while Service B has 15%—resources shift toward Service A.
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