What is the difference between gross, operating and net profit margin?

Gross margin is revenue minus the direct cost of goods sold, as a percentage of revenue. Operating margin then subtracts running costs like rent and wages, showing core profitability before interest and tax. Net margin is what is left after everything, including interest and tax. The same business can show, say, 40% gross, 10% operating and 6% net.

How do I calculate profit margin?

Divide profit by revenue and multiply by 100. For net margin, use net profit (after all costs, interest and tax): a business with 200,000 revenue and 12,000 net profit has a net margin of 12,000 / 200,000 = 6%. Use gross profit for gross margin and operating profit for operating margin, with the same formula each time.

What is the difference between margin and markup?

Markup is profit as a percentage of cost; margin is profit as a percentage of the selling price. An item that costs 100 and sells for 150 has a 50% markup but only a 33% margin. Confusing the two leads to undercharging. To hit a target margin, divide the cost by (1 minus the margin as a decimal).

Is a higher profit margin always better?

Not necessarily. A higher margin is generally good, but a low margin can be perfectly healthy in a high-volume, low-cost sector like grocery or hospitality, and a high margin can mask problems such as underinvestment or shrinking sales. What matters more is that your margin is appropriate for your industry and steady or improving over time.

Is a 20% profit margin good?

A 20% net profit margin is strong for many small businesses and would be excellent in a low-margin sector like grocery or hospitality. In some low-cost digital businesses it would be unremarkable. As a gross margin, 20% is on the low side for most product businesses. So it depends on which margin you mean and what industry you are in.

What is a good gross profit margin?

Gross margins run much higher than net margins because they only subtract the direct cost of goods sold. Depending on the sector they often sit anywhere from around 30% to 60% or more, with software and services higher and low-markup retail lower. Because the normal range is so sector-specific, compare your gross margin with similar businesses rather than a single figure.

Can a profit margin be negative?

Yes. A negative profit margin means the business made a loss over the period: costs exceeded revenue, so profit is below zero. It is common in early-stage or seasonal businesses, but a persistently negative margin means prices are too low, costs too high, or sales too thin, and needs addressing.

Money and tax4 November 2026·8 min read·Written by Remit Team

What Is a Good Profit Margin for a Small Business?

Q: What is a good profit margin for a small business?

Some commonly quoted rules of thumb treat about 10% net margin as healthy for many small businesses, around 5% as thin, and 20% or more as strong, but these are only rough context. It depends heavily on your industry: restaurants and grocery stores survive on low single-digit margins, while software and professional services run much higher. Compare yourself to businesses like yours, not a universal number.

It is one of the most asked questions in small business, and most answers are unsatisfying because they skip two things: which margin you mean, and what industry you are in. A software business and a grocery shop can both be healthy on completely different margins, so a single number tells you little on its own. Below: the three margins, a worked example, why benchmarks differ by industry, margin versus markup, and how to improve yours. It is general business information, not financial advice, and the right target for you depends on your sector and costs, so treat the benchmarks here as rough guides, not rules.

A laptop showing simple business figures, representing a profit margin calculation

First, which profit margin do you mean?

Profit margin is profit as a percentage of revenue, but there are three different profits, and confusing them is where most of the muddle starts. Gross profit margin is revenue minus the direct cost of what you sell (materials, the stock itself, direct labour), as a percentage of revenue. It tells you how much is left after making or buying the thing, before any overheads. Operating profit margin then takes out your running costs (rent, salaries, software, marketing), showing how profitable the core business is before interest and tax. Net profit margin is what is left after all costs, including interest and tax, as a percentage of revenue: the bottom line.

When people ask what a good margin is, they usually mean net margin, but they often quote gross-margin numbers by mistake, which is why the advice online seems to contradict itself. A shop might run a 40% gross margin and a 4% net margin, and both are normal. So before comparing yourself to any benchmark, be clear which of the three you are measuring, and compare like with like.

How to calculate profit margin (with an example)

Each margin is the same simple formula, just with a different profit on top: margin = (profit divided by revenue) times 100. The skill is getting the right profit figure for each level.

Worked example. Say a small business has revenue of 200,000 in a year. The direct cost of the goods and services it sold was 120,000, its running costs (rent, wages, software, marketing) were 60,000, and interest and tax came to 8,000. Gross profit is 200,000 minus 120,000 = 80,000, a gross margin of 80,000 divided by 200,000 = 40%. Operating profit is 80,000 minus 60,000 = 20,000, an operating margin of 10%. Net profit is 20,000 minus 8,000 = 12,000, a net margin of 12,000 divided by 200,000 = 6%. Same business, three very different numbers, which is exactly why you have to say which one you mean.

So what is a good net profit margin?

As a very rough rule of thumb often quoted for small businesses, a net margin around 10% is considered healthy, 5% is on the thin side, and 20% or more is strong. But that is a starting point, not a verdict, because the honest answer is that it depends heavily on your industry. The number only means something next to businesses like yours.

The spread is huge. Restaurants and grocery stores famously run low single-digit net margins and survive on volume; professional services and software can run far higher because their direct costs are low. A 5% net margin can be excellent in one sector and worrying in another. So the useful comparison is not against a universal number but against typical margins for your type of business, and against your own trend over time: a margin that is steady or rising is usually a better sign than hitting any particular figure once.

One more thing to watch if you are a sole trader: your net profit usually includes your own labour as profit, because you do not pay yourself a separate wage. A 10% net margin may therefore be your pay, not a return earned on top of it, which is why many owners also compare their net profit against what they would earn employed.

Typical profit margins by industry

Because the right figure is so sector-dependent, it helps to look at published ranges rather than a single rule. Public datasets of margins by industry, such as the widely cited NYU Stern (Damodaran) sector tables, generally show restaurants and grocery retail sitting in low single-digit net margins, construction and general retail in the low-to-mid single digits, and software, financial services and specialised professional services reaching the teens or higher. These are broad patterns, not targets, and the exact numbers move with the year, the country and the size of the business, so use them for orientation only.

The practical takeaway is to find the typical range for your own sector before judging your margin. A figure that looks low against a cross-industry average can be perfectly normal for a high-volume, low-margin business, and a figure that looks high can still be below par for a low-cost digital one. Benchmark against businesses that make money the way yours does.

Margin is not markup (the pricing mistake to avoid)

This is one of the most common and costly pricing mistakes, so it is worth being precise. Markup is profit as a percentage of cost; margin is profit as a percentage of the selling price. They are not the same number. If something costs you 100 and you sell it for 150, that is a 50% markup (50 on top of the 100 cost) but only a 33% margin (50 out of the 150 price). Mix them up when pricing and you will quietly undercharge.

The practical takeaway is to price from the margin you want, not the markup. To hit a target margin, divide the cost by (1 minus the margin as a decimal): to make 40% margin on a 100 cost, sell at 100 divided by 0.60 = about 167, not 140. Our guide on how to price your work and the post on how much to charge build on this, and getting it right is the difference between a margin that looks fine on paper and one that actually pays you.

How to improve your profit margin

Broadly, there are two levers: raise what you earn per sale, or cut what each sale costs. Many businesses lean too hard on one. You can raise revenue per sale (put prices up, sell a better mix, add higher-value services, reduce discounting) or cut costs (negotiate with suppliers, trim waste, drop unprofitable lines, lower overheads). Price is usually the faster lever and the more neglected one, because a modest price rise can drop largely to the bottom line, provided it does not cost you too many customers, while chasing cost savings has a floor.

A quieter third factor is getting paid on time, because cash tied up in late invoices does not improve the margin on paper but it squeezes the cash a business has to run on. Keeping your pricing deliberate and your invoicing tight is where a tool helps: with Remit you can send clear invoices and quotes that state your prices confidently, and track what is owed with a statement of account per client, so you can see what has been billed and what is still unpaid.

What is a good profit margin? The short answer

There is no single good number. Pick the margin you mean (gross, operating or net), calculate it with the simple profit-over-revenue formula, and compare it with similar businesses and your own past figures rather than a universal figure. As a loose guide a net margin near 10% is healthy for many small businesses, but a low margin can be perfectly normal in a high-volume sector and a high one can hide problems in another.

Keep margin and markup straight so your pricing works, pull the price lever as well as the cost one, and collect what you invoice. This is general business information and not financial advice, so use the benchmarks here as rough context and speak to an accountant for targets and decisions specific to your business and industry.