What Is Profit Margin and How Do You Calculate It?

Profit margin measures how much profit a business earns relative to its revenue. It’s expressed as a percentage.

Businesses use profit to pay owners and fund growth. In a 2025 Shopify survey of 500 established merchants,* 79% said they use profits to self-fund growth. Profit margin helps store owners see how much of each sales dollar is available to reinvest.

This guide explains how profit margins work and how typical margins compare across industries and businesses.

What is profit margin?

Profit margin, also called the profit margin ratio, measures profit as a percentage of revenue. The costs included depend on whether a business calculates gross, operating, or net profit margin.

A Shopify survey from the fourth quarter of 2025 found that fewer than half of store owners tracked profit margin. Reviewing the ratio over time makes it easier to see when costs consume a larger share of revenue. If sales rise while profit margin falls, costs are growing faster than revenue.

Businesses with high profit margins

According to January 2026 US sector data from New York University’s Stern School of Business, 9.74% net margin for the total market. Several industries were well above that figure:

• Semiconductors: 30.45%
• Entertainment software: 29.93%
• Pharmaceuticals: 18.54%

Businesses with low profit margins

Several industries reported lower net margins:

• Food wholesalers: 1.17%
• Air transport: 2.51%
• Farming and agriculture: 3.91%

A low margin doesn’t mean a business is losing money. A 2% net margin means the business earns $2 in net income for every $100 in revenue. High sales volume can still produce substantial total profit.

How to calculate profit margin

The profit margin formula divides profit by revenue and converts the result to a percentage:

Profit margin = (profit ÷ revenue) × 100

Profit margin can refer to gross, operating, or net profit margin. Each calculation uses the same basic formula but includes different costs.

Choose the margin type based on the costs the calculation needs to include. Then gather revenue and expense figures from the same reporting period and follow these steps:

1. Find total revenue. Use sales revenue from the period being measured.
2. Calculate profit. Subtract the costs counted under the chosen margin type.
3. Divide profit by revenue. The result will be a decimal.
4. Multiply by 100. The result is the profit margin percentage.

Profit margin calculation example

Say an online store generates $50,000 in monthly revenue and records $30,000 in cost of goods sold (COGS).

Gross profit = $50,000 − $30,000 = $20,000

Gross profit margin = ($20,000 / $50,000) x 100 = 40%

A 40% gross profit margin means the store earns 40¢ in gross profit for each dollar of revenue before other business expenses.

Use Shopify’s free profit margin calculator to make this easier. Enter the cost per item and selling price to calculate profit per item and margin.

Types of profit margin

This guide covers three types of profit margin: gross, operating, and net. Each calculation divides a different measure of profit by revenue.

What is gross profit margin?

Gross profit margin measures the percentage of net sales left after subtracting COGS. COGS covers direct product costs such as materials and production labor.

Gross profit margin = [(net sales − COGS) / net sales] x 100

Consider a retailer with $8,000 in net sales and $6,000 in COGS:

1. Find gross profit: $8,000 − $6,000 = $2,000.
2. Calculate the margin: ($2,000 / $8,000) x 100 = 25%.

The retailer’s gross profit margin is 25%.

When to use gross profit margin

Use gross profit margin to assess pricing and direct product costs. Calculate it for the full business or a specific product. If product costs rise while prices remain unchanged, gross profit margin falls.

What is operating profit margin?

Operating profit margin measures the percentage of net sales left after subtracting COGS and operating expenses. Operating expenses cover costs such as rent and payroll. The calculation excludes interest and taxes.

Operating profit margin = (operating income / net sales) x 100

Suppose a business records $100,000 in net sales. COGS totals $60,000 and operating expenses total $20,000:

1. Calculate operating income: $100,000 − $60,000 − $20,000 = $20,000.
2. Divide operating income by net sales: $20,000 / $100,000 = 0.2.
3. Convert the result to a percentage: 0.2 x 100 = 20%.

The business’s operating profit margin is 20%.

When to use operating profit margin

Use operating profit margin to measure profit from regular business activity before interest and taxes. Compare the result with similar businesses in the same industry.

What is net profit margin?

Net profit margin measures the percentage of revenue left as net income after all expenses. The calculation accounts for COGS, operating expenses, interest and taxes.

Net profit margin = (net income / total revenue) x 100

Say a business records $150,000 in revenue and $135,000 in total expenses. Net income is $15,000.

Net profit margin = ($15,000 / $150,000) x 100 = 10%

The business’s net profit margin is 10%.

A July 2026 FactSet report put the blended net profit margin for the S&P 500 in Q2 2026 at 15.7%. The five-year average was 12.4%. The calculation combined reported results with estimates for companies that had not yet released results.

When to use net profit margin

Use net profit margin to assess overall profitability after all expenses are deducted. 

What is a good profit margin?

There’s no universal profit margin that is good across businesses. A useful target depends on the industry and the type of margin being measured. Sales channel costs and expected sales volume also affect it.

Different products within the same business can also support different profit margins. A merchant may accept a lower margin on one product if it drives higher sales volume, repeat purchases, or complementary sales elsewhere in the catalog.

Michael Petry, creative director and partner at Golden West Boots, says businesses sometimes have to balance higher margins against higher sales volume:”

“You have to pick your lanes and pick your poison when it comes to margin versus volume. You’ll meet investors that’ll say, ‘We don’t do anything for less than 90 points of margin.’ I appreciate that position. I don’t disagree with it, but maybe sometimes that’ll push you into a price point that doesn’t get you the volume,” he says.

Several factors influence what qualifies as a good profit margin:

• Industry and business model. Product costs and price constraints differ across industries. A grocery retailer will target a different number than a software company.
• Margin type. Specify whether the target refers to gross, operating, or net margin. A net margin can’t be judged against a gross margin ratio benchmark.
• Sales channel. Channel costs affect how much revenue becomes profit. A marketplace commission can reduce net margin even when product costs stay the same.
• Sales volume. A low margin can still produce substantial profit when sales volume is high. Businesses with lower sales may need to earn more per transaction.
• Growth plans. A business planning to hire or develop a product may set a higher target to retain enough profit to cover those costs.

Sales channel data shows how widely margins can vary among similar sellers. The Small Business & Entrepreneurship Council’s 2025 survey covered 532 US small businesses with 2 to 99 employees. 

Among respondents who sold on Amazon, the most commonly reported profit margin was 21% to 30%, cited by 19% of sellers. Another 21% reported margins below 11%. At the other end, 17% reported margins above 50%.

Industry data provides another reference point. NYU Stern’s January 2026 US sector data reports aggregate gross and net margins for public companies. 

The figures provide context for small businesses but aren’t direct targets:

Choose the closest industry category and the correct margin type. Then compare the business’s current result with its own performance over time.

How to improve your profit margin

Profit margin improves when each sale generates more profit or when the business directs sales toward high-profit margin products. Start with these four areas.

1. Track revenue and profit margin

A 2025 Shopify survey* found that 77% of store owners tracked sales or total revenue, making it the most commonly tracked metric. Fewer than half tracked profit margin, traffic, average order value, or conversion rate. 

Shopify’s profit reports break down gross profit and margin by product, variant, POS location, and order when cost data is recorded. Third-party Shopify App Store tools such as TrueProfit and BeProfit can calculate net profit after expenses such as advertising and shipping.

2. Check your pricing first

Review product prices before cutting costs elsewhere. In June 2026, 38% of small business owners reported raising their average selling prices. That was the highest reading since January 2023. 

Calculate how a proposed price change would affect unit margin, then test it on a limited group of products and monitor sales volume.

3. Reduce your COGS as you scale

Request new supplier quotes as order volume grows. The 2025 Small Business Credit Survey found that 77% of employer firms faced rising costs for goods, services, or wages, tariff-related cost increases, or both during the prior 12 months. 

Tariff costs were a financial challenge for 69% of retail firms, the highest share among the industries surveyed. Use larger purchase volumes to negotiate lower unit costs, but account for storage and financing costs before placing the order.

4. Shift your product mix toward higher-margin items

When higher-margin products account for a larger share of revenue, the store retains more gross profit per sales dollar. 

In a Deloitte survey of 330 global retail executives, 72% said they planned to shift their product mix toward higher-margin or value-added items in the year ahead. 

Review gross profit and sales volume by SKU. Give more inventory and merchandising space to products that sell consistently and generate higher profit per sale.

*Based on a 2025 survey of 500 Shopify merchants conducted in English across Australia, Canada, the United Kingdom, Ireland, New Zealand, and the United States. Respondents were established merchants with two or more years on the platform. Results reflect the experiences of this specific sample and may not be representative of all merchants.