Profit Margin Calculator
Three margins, three different stories. Gross margin describes the unit economics; operating margin describes the business; net margin describes the bottom line after every deduction.
The three margins
Each margin removes a successive layer of cost. Gross margin shows how profitable the product is per unit of revenue. Operating margin shows whether the business covers its overhead. Net margin is what's left after taxes and the cost of capital.
What each margin tells you
Gross margin is the most important margin for a growing business because it caps everything else. A 30% gross margin business cannot grow into a 30% operating margin business. Gross margin reflects the value the product creates relative to what it costs to deliver — pricing power, manufacturing efficiency, and scale economics all live here.
Operating margin reveals the cost discipline of the company. It's the margin after the company's chosen levels of marketing, R&D, and G&A. Operating margin can be deliberately depressed (heavy growth investment) or deliberately elevated (mature company harvesting). The right level depends on the stage and strategy.
Net margin is what flows to shareholders. It's affected by debt level (interest), tax position (jurisdiction, NOLs, deferred tax accounting), and one-time items. Net margin volatility is normal even when operating margin is stable.
Margin benchmarks (rough, not gospel)
| Industry | Gross | Operating | Net |
|---|---|---|---|
| Software (SaaS) | 70-85% | 0-30% | 0-25% |
| Hardware (mid-market) | 30-45% | 5-15% | 3-10% |
| Retail (specialty) | 40-55% | 5-12% | 3-8% |
| Restaurants | 60-70% (food cost ~30-40%) | 3-9% | 2-6% |
| Professional services | 40-60% | 10-25% | 7-18% |
| Distribution / wholesale | 15-30% | 3-8% | 2-5% |
Worked example
A specialty foods business reports $14.0M revenue, $5.6M COGS, $5.5M operating expenses, $300K interest expense, and $600K in tax. Gross profit: $8.4M (60% margin). Operating profit: $2.9M (20.7% margin). Net profit: $2.0M (14.3% margin). The 60% gross margin is healthy for the category; the 20.7% operating margin reflects deliberate investment in distribution; the 14.3% net margin is well above industry medians.
What margin alone doesn't tell you
- Capital intensity. A 15% net margin business that needs constant capex is not equivalent to a 15% net margin business with no capex. Free cash flow margin is the truer measure.
- Growth trade-off. A high-margin business that isn't growing can be worth less than a low-margin one that is, if the second has higher long-run free cash flow.
- Customer mix. Blended margins can hide a money-losing customer subsidized by a profitable one. Compute by segment.
- Working capital. A profitable business can still run out of cash. See working capital and runway.