Profit margin: what it is, how to calculate it and why it matters

Published Tuesday 6 October 2026

Table of contents

• What is a profit margin?
• Types of profit margins
• How to calculate profit margins
• What is a good profit margin?
• Why profit margins matter
• How to increase your profit margins
• Track your profit margins with Xero
• FAQs on profit margins

Key takeaways

• Calculate your profit margin with (Profit ÷ Revenue) × 100 to see how much of each sale you keep and to guide pricing decisions.
• Lift your margins by reviewing costs, automating routine work, training staff and testing small price increases.
• Compare your margins with your own industry: in January 2026, US software companies averaged a 25.49% net margin, while grocery retailers averaged 1.32%.
• Track margin trends over time, as rising margins signal better efficiency and falling margins point to cost pressures worth fixing.

What is a profit margin?

Profit margin is the percentage of revenue you keep as profit after paying business expenses. You work it out with the formula (Profit ÷ Revenue) × 100.

The higher the percentage, the more profit you keep from each sale. It shows whether your pricing covers costs and leaves room for growth.

A strong profit margin signals financial health and tells you:

• Cost coverage: Your revenue covers expenses with room to spare.
• Performance visibility: You can see which products or services generate the most profit.
• Decision support: You know where to cut costs or adjust pricing.

Profit margin vs net profit

Net profit is a dollar amount: the profit left after you deduct all expenses from revenue.

Profit margin is a percentage: it shows what portion of each dollar in revenue becomes profit. That makes it easier to compare performance across time periods or against other businesses, whatever their size.

Types of profit margins

There are three main types of profit margins. Each measures profitability at a different stage of your business operations:

• Gross profit margin measures revenue remaining after paying for the goods and services you sell (cost of goods sold). Use it to set pricing, spot areas to improve and compare periods.
• Operating profit margin measures profit after operating costs like wages and rent, but before interest and tax. Investors and lenders often review it to judge your core operations.
• Net profit margin measures profit remaining after paying all costs and taxes. It’s the most complete indicator of financial health because it accounts for every expense.

All three sit alongside other profitability ratios you can use to compare performance. For more detail on the bottom-line measure, read about what net profit margin tells you.

How to calculate profit margins

To calculate profit margin, divide profit by revenue and multiply by 100. The examples below follow one Singapore café through all three margins, in Singapore dollars and excluding goods and services tax (GST).

Profit margin = (Profit ÷ Revenue) × 100

This gives your margin as a percentage, so you can compare it across periods or against other businesses. In Excel, the same formula is =(Profit/Revenue)*100.

Gross profit margin calculation

Gross profit margin shows how much of each sale is left after the direct cost of what you sell. Follow these steps:

1. Calculate gross profit: revenue minus cost of goods sold
2. Divide gross profit by revenue
3. Multiply by 100 to get the percentage

Example: your café earns $150,000 in revenue in a year and spends $60,000 on cost of goods sold, such as coffee beans, milk and food.

• Gross profit: $150,000 − $60,000 = $90,000
• Gross profit margin: $90,000 ÷ $150,000 × 100 = 60%

Use the Xero gross profit margin calculator to run your own numbers.

Operating profit margin calculation

Operating profit margin shows what’s left once you’ve also paid the costs of running the business. Follow these steps:

1. Calculate operating profit: gross profit minus operating expenses
2. Divide operating profit by revenue
3. Multiply by 100 to get the percentage

Example: from the $90,000 gross profit, your café spends $60,000 on operating expenses such as rent, wages and utilities.

• Operating profit: $90,000 − $60,000 = $30,000
• Operating profit margin: $30,000 ÷ $150,000 × 100 = 20%

Net profit margin calculation

Net profit margin shows what you keep after every cost, including interest and tax. Follow these steps:

1. Calculate net profit: operating profit minus interest and tax
2. Divide net profit by revenue
3. Multiply by 100 to get the percentage

Example: your café pays $2,000 in interest, leaving a profit before tax of $28,000. After the partial tax exemption, $11,500 of that is chargeable income, taxed at Singapore’s 17% corporate income tax rate before any rebate.

• Profit before tax: $30,000 − $2,000 = $28,000
• Tax: $11,500 × 17% = $1,955
• Net profit: $28,000 − $1,955 = $26,045
• Net profit margin: $26,045 ÷ $150,000 × 100 = 17.4%

Use the Xero net profit margin calculator to calculate yours.

What is a good profit margin?

A good profit margin depends on your industry and the type of margin you’re measuring. Industry benchmarks give you a useful starting point.

NYU Stern’s January 2026 margin data, compiled by Professor Aswath Damodaran, puts average net margins for US companies at:

• 9.74% across the total market
• 25.49% for system and application software
• 9.37% for restaurants and dining
• 1.32% for grocery and food retail

These figures come from large listed US companies, so treat them as a rough guide for a Singapore small business. Gross profit margins are naturally higher than net margins because they don’t include all expenses.

Compare your margins with others in your industry for the most useful benchmark. Low-margin businesses like grocery stores rely on high sales volume. High-margin businesses like consulting firms earn more per sale but may have fewer transactions.

Why profit margins matter

Profit margins show your business’s financial health by revealing how much of your revenue you keep as profit. They’re one of the simplest ways to measure profitability and guide decisions in these areas:

• Pricing: Work out whether your prices cover costs and generate enough profit.
• Cost control: Identify where expenses eat into your margins.
• Resource allocation: Prioritise spending on products or services with higher returns.

You can use your margins to:

• Set prices: Identify which products deliver healthy margins and adjust pricing accordingly.
• Create budgets: Allocate resources to higher-margin products and services.
• Guide investments: Direct spending towards the most profitable parts of your business.

When you seek funding, banks and investors review your margins to judge whether your business is a sound investment. High margins create opportunities for growth:

• Attract investment: Strong margins signal financial health to lenders and investors.
• Reinvest in growth: Extra profit funds new equipment, staff or marketing.
• Experiment with pricing: More cushion lets you test strategies without risking losses.

Compare your margins against competitors to see where you stand and spot opportunities.

Healthy margins don’t guarantee growth, and margins don’t automatically rise as a business expands. Rapid growth can reduce margins if short-term costs spike, so focus on sustainable growth and monitor your margins as you scale.

What profit margin trends reveal

Tracking margins over time shows whether your financial health is improving or declining. Look for these patterns:

• Rising margins: Improved efficiency or successful price increases.
• Falling margins: Rising costs, pricing pressure or operational issues.
• Stable margins: Consistent performance, though this may signal missed growth opportunities.

Compare your trends against industry benchmarks and competitors to understand your position in the market.

Factors affecting profit margins

Several factors influence your margins, some within your control and some not. Here are the main ones:

• Industry type: Retail and hospitality typically have higher overheads and tighter margins than consulting or software businesses.
• Economic conditions: Inflation and rising interest rates increase costs; borrowed funds become more expensive to service.
• Location: Rent, local taxes and regional wage expectations vary and affect your cost base.
• Business model: Online businesses often achieve higher net margins than bricks-and-mortar stores due to lower overheads.

Account for these factors when setting prices and evaluating your performance. Checking your margin of safety also shows how far sales can drop before you stop making a profit.

How to increase your profit margins

To increase profits and improve your margins, focus on cutting costs, improving efficiency and adjusting pricing. Here’s how to tackle each.

1. Control your costs

Review expenses regularly to find savings. Start with these areas:

• Cancel unused subscriptions and software licences
• Renegotiate supplier contracts or find alternative vendors
• Reduce waste in materials and inventory
• Manage labour costs by matching staffing to demand

2. Make your operations more efficient

Look at how your business runs day to day. These changes can save time and money:

• Automate repetitive tasks like invoicing and data entry
• Invest in staff training to reduce errors and rework
• Improve customer service to increase repeat business
• Encourage your team to suggest process improvements

3. Adjust your pricing

Set prices that reflect your value and cover costs. Try these approaches:

• Use dynamic pricing to adjust for demand and seasonality
• Create premium packages or bundles to increase average sale value
• Review competitor pricing to check you’re positioned correctly
• Test small price increases and monitor customer response
• Communicate your value so customers understand why they should choose you
• Build customer loyalty, as repeat customers provide steadier revenue and cost less to serve than new ones

Track your profit margins with Xero

Understanding your profit margins helps you price with confidence and plan for sustainable growth. Tracking them regularly keeps you on top of your business’s financial health.

With Xero, you get real-time visibility into your profitability through automated reporting and easy-to-read dashboards. You can monitor margins across products, services and time periods without manual calculations.

Try Xero accounting software and get one month free.

FAQs on profit margins

Here are answers to common questions about profit margins.

What does a 20% profit margin mean?

A 20% profit margin means you keep $0.20 of every dollar in revenue after covering the relevant costs. For example, $50,000 in revenue at a 20% net profit margin gives you $10,000 in net profit.

What’s the difference between gross and net profit margin?

Gross profit margin only subtracts the direct cost of what you sell, while net profit margin subtracts every cost, including overheads and tax. A wide gap between the two, like the café’s 60% gross and 17.4% net margins, shows how much overheads take from each sale.

Can a profit margin be negative?

Yes: a negative margin means your costs are higher than your revenue, so the business made a loss. For example, $100,000 in revenue and $110,000 in costs gives a margin of −10%, a signal to review your pricing and costs quickly.

Should I include GST when calculating profit margin?

If you’re GST-registered, leave the GST you collect out of your revenue, because you owe it to the Inland Revenue Authority of Singapore (IRAS). At the current GST rate of 9%, a $109 sale including GST counts as $100 of revenue.

How often should I calculate my profit margin?

Review your profit margins at least monthly. Weekly tracking helps you spot issues early and respond quickly to changes in costs or sales.

What’s the difference between markup and profit margin?

Markup is the percentage added to your cost to set a selling price, while profit margin is the share of the selling price that becomes profit. A 50% markup on a $40 item means you sell it for $60, giving a 33% margin ($20 profit ÷ $60 price).