Quick answer
A good profit margin is usually 10% or higher for most businesses, though this varies significantly by industry. A net profit margin of 5% is considered low, 10% is healthy, and 20% or above indicates strong profitability. Compare your margin to industry-specific benchmarks for a more accurate assessment.
It’s common for small businesses to struggle with cash flow management, especially as operations begin to scale. According to our cash flow management survey, 39% of small businesses have less than one month of cash on hand, meaning almost two of every five small businesses are operating without consistent profit.
To help you make informed financial decisions, this guide will explain different types of profit margins, the benchmarks you can use to assess them, and which investment and cost-cutting strategies can improve your margins.
What you need to know
- There are three types of profit margins: gross, operating, and net. They each measure profitability at different stages of your business operations.
- Industry benchmarks vary dramatically: Software companies average 71% gross margins while food wholesalers average just 15%.
- Improving profit margins requires the right balance of strategic pricing and cost control.
- Always benchmark against direct competitors rather than generic targets, as margin norms differ significantly across sectors.
What is a good net profit margin?
The answer varies slightly based on your industry, business model, cost structure, and business stage. The table below offers a general view of net profit margins across industries, but you should use industry-specific benchmarks to assess your progress. For example, a grocery store can be considered comfortably profitable with a low margin of 2–3% because they sell a high volume of products and pay high distribution costs.
| Net profit margin | Assessment | What it means |
|---|---|---|
| 20% or higher | High/Very Healthy | The business is very efficient at converting revenue into profit. |
| 10% | Healthy/Good | Solid and sustainable growth for most businesses. |
| 5% | Low/Risky | The business may be vulnerable to seasonal fluctuations, rising costs, or economic shocks. |
| Below 5% | Needs Analysis | Indicates high financial risk or poor, unsustainable cost management. |
Specialized expertise, intellectual property, and premium positioning can also affect a business’s profit margin. These are unique to each company, so you’ll have to assess them in addition to industry benchmarks. These expenses also tend to be non-necessary, so consider the value they add to your business if you’re looking to cut costs during a cash flow analysis.
Types of profit margin
Small business owners tend to focus on net profit margins (“the bottom line”), but gross and operating profit margins are just as important for cash flow management—each metric measures profitability at different stages.
Keep in mind that measuring profit is more than just adding up inflows and subtracting outflows. It’s important to understand the difference between profit and cash flow before making financial decisions. A business can show healthy profit margins while still struggling with cash flow if customers pay slowly or inventory ties up working capital.
Gross profit margin
Think of the three categories of profit margin as your business’s profitability at each stage of the accounting process. Gross profit margin is the first level: You calculate it by dividing your gross profit (Revenue – Cost of Goods Sold) by your revenue, then multiplying the result by 100 to get a percentage.
How to calculate gross profit margin
Gross Profit = Revenue – Cost of Goods Sold
Gross Profit Margin = (Gross Profit ÷ Revenue) × 100
Example: If your business generates $500,000 in revenue and your COGS is $300,000, your gross profit is $200,000. Your gross profit margin is ($200,000 ÷ $500,000) × 100 = 40%.
A healthy gross profit margin typically ranges from 50% to 70% for product-based businesses, while service businesses often achieve higher margins due to lower direct costs. This metric is essential for making pricing and product decisions.
Bluevine Tip
To improve gross profit margin, negotiate better rates with suppliers, consider bulk purchasing for discounts, or explore alternative vendors without sacrificing quality.
Operating profit margin
To calculate operating profit margin, subtract the cost of goods sold (COGS) and operating expenses from your total revenue. (Operating expenses include rent, utilities, salaries, marketing, and other day-to-day business costs.)
How to calculate operating profit margin
Operating Profit = Revenue – COGS – Operating Expenses
Operating Profit Margin = (Operating Profit ÷ Revenue) × 100
Example: If your business has $500,000 in revenue, $300,000 in COGS, and $100,000 in operating expenses, then your operating profit is $100,000. Your operating profit margin is ($100,000 ÷ $500,000) × 100 = 20%.
This profit margin ratio is useful because it excludes interest and taxes, focusing purely on operational efficiency and cost control.
Bluevine Tip
Audit your operating expenses quarterly. Look for redundant software subscriptions, renegotiate lease terms, or implement automation to reduce labor costs on repetitive tasks.
Net profit margin
Net profit margin is often called “the bottom line” because it appears at the bottom of the income statement. It measures the percentage of revenue remaining as profit after subtracting all expenses (including COGS, operating expenses, interest, and taxes). This is the most comprehensive measure of your business’s overall profitability.
How to calculate net profit margin
Net Profit = Revenue – All Expenses
Net Profit Margin = (Net Profit ÷ Revenue) × 100
Example: If your $500,000 revenue business has a net income of $50,000 after all expenses, your net profit margin is ($50,000 ÷ $500,000) × 100 = 10%.
Track net profit margin over time and compare your business to others in your industry. Viewing your different profit margins at each stage of your accounting can provide the insights you need to improve your profit margins sustainably.
Bluevine Tip
Work with a tax professional to identify deductions and credits you may be missing. Strategic tax planning can significantly impact your net profit margin without changing your operations.
Profit margin benchmarks by industry
Let’s look at how industry benchmarks work. The table below shows the average gross, operating, and net profit margins for a select group of industries, as collected from multiple data services by the New York University Stern School of Business. Understanding your industry standards and how margins fluctuate across the stages of accounting can help you set realistic expectations for your business.
| Industry | Avg. Gross Margin | Avg. Operating Margin | Avg. Net Margin |
|---|---|---|---|
| Software (System & Application) | 71.72% | 40.81% | 25.49% |
| Banks (Regional) | 99.63% | 1.60% | 27.49% |
| Real estate (General/Diversified) | 51.23% | 23.61% | 23.77% |
| Healthcare products | 54.00% | 17.40% | 9.61% |
| Restaurant/Dining | 32.24% | 17.16% | 9.37% |
| Retail (General) | 33.18% | 8.15% | 5.61% |
| Food wholesalers | 15.44% | 2.75% | 1.17% |
| Transportation | 24.10% | 8.45% | 8.23% |
Additional factors affecting profit margins
Industry benchmarks help provide an idea of where you should be, but you’ll need to assess how the factors below are affecting your business’s individual profit margins. For a more complete analysis, track a few key financial KPIs, too.
- Cost structure: Industries with fluctuating cost of goods sold (COGS) tend to have lower profit margins. Restaurants are good examples of this because labor and food costs account for a large share of their operating expenses.
- Growth stage: Startups and early-stage companies may have low or inconsistent margins while they build products and expand into their market. Mature businesses may see unpredictable margins during times of investment and ambitious growth.
- Margin trends: Cutting costs or increasing your prices can improve profit margins, but these things can also decrease profit margins if done incorrectly or without proper consideration. Make adjustments regularly, as needed.
- Tax considerations: Taxes are only factored in when calculating net profit. That’s important to remember when assessing your gross and operating margins.
Bluevine Tip
Don’t confuse higher revenue with strong margins. A business generating $2 million with a 5% margin keeps less money than one generating $1 million with a 15% margin. Focus on profitability percentages, not just top-line growth.
Ways to improve your profit margin
There are many ways to increase profits in addition to acquiring new customers:
- Raise prices strategically: Don’t be afraid to increase prices when your costs go up, but pricing should be fluid and transparent, especially in industries with inflationary costs or products in high demand.
- Reduce cost of goods sold: You can cut back on necessary costs by renegotiating supplier contracts, switching to more affordable vendors, or taking advantage of bulk order pricing offers.
- Streamline operating expenses: Newer companies usually don’t have much operational waste, while more established businesses may accumulate inefficiencies over time. Assess which expenses can be streamlined or eliminated.
- Improve product or service mix: Low-margin offerings can be eliminated or bundled with higher-margin products to improve profitability. Retail companies often use clearance sales to do this. A paid service contract can also improve your margins.
- Increase customer lifetime value: Calculate the lifetime value (LTV) of each customer. Look for ways to increase it. Upsells and secondary offerings are good for this. Customer loyalty programs also work if you offer discounts or buying incentives.
- Improve inventory management: Reduce holding costs by implementing better demand forecasting and purchasing discipline.
Get funding that helps your margins grow
Understanding profit margins is a positive step toward building a financially healthy business. Learn to track gross, operating, and net margins. Find industry-specific benchmarks you can use to measure your company against your closest competitors. With accurate expectations, you can work on cutting costs and increasing revenue to improve your margins.
If you need funds to take the next step, a business line of credit gives you the flexibility to invest in margin-improving initiatives when opportunities arise, without the pressure of a lump-sum loan or the need to reapply each time. Explore Bluevine’s funding solutions designed specifically for small businesses looking to grow smarter and more profitably.
Profit margin FAQs
Is 50% profit margin good in a small business?
A 50% profit margin is excellent by most standards, but the answer depends on which type of margin (gross, operating, or net) you’re measuring and which industry you’re in. For instance, a 50% gross margin is below average for a software-as-a-service or healthcare product business, but a 50% operating or net profit margin is excellent for any business type.
How can operating expenses affect operating margin?
Operating expenses directly reduce operating margin because they’re subtracted from gross profit to calculate operating income. Every dollar spent on rent, salaries, utilities, marketing, insurance, or software subscriptions reduces your operating profit.
What is a good profit margin for a small business?
The average profit margin for a small business varies by sector, with service businesses often achieving higher margins (15-20%) than retail or manufacturing (5-10%). Many small businesses also face common challenges when starting out that can impact margins.
How much profit should you make on a product?
Ideal profit margins vary significantly by industry, business model, and competitive positioning. In addition, your gross, operating, and net margins will vary significantly as you factor in costs at each stage of your accounting process.
