Profit Margin Guide
Learn what profit margin means, how to calculate gross and net margin, and why revenue can hide weak business economics.
Quick answer
Profit margin shows how much of each sale remains as profit. A business with £10,000 revenue and £2,000 profit has a 20% profit margin. Margin matters because revenue alone does not show whether the business is healthy.
Profit margin formula
Profit margin = Profit ÷ Revenue × 100
| Revenue | Profit | Margin |
|---|---|---|
| £1,000 | £200 | 20% |
| £5,000 | £750 | 15% |
| £10,000 | £1,000 | 10% |
| £20,000 | £1,000 | 5% |
Gross vs net margin
Gross margin focuses on direct product or service cost. Net margin includes more costs such as software, staff, rent, payment fees, advertising, returns, and admin. A product can have a strong gross margin but weak net margin if overhead or marketing costs are high.
Why margin matters for eCommerce
Online sellers often focus on sales volume. But platform fees, payment processing, shipping, returns, packaging, discounts, and advertising can reduce margin quickly. A product that looks profitable before ad spend may lose money after customer acquisition cost.
Common mistakes
- Calculating margin from revenue minus product cost only.
- Ignoring shipping and payment fees.
- Not including returns or refunds.
- Confusing markup and margin.
- Using average margin while one product loses money.
- Chasing sales volume with no profit.
Practical margin review
Review margin by product, not just overall business. Identify products that bring profit, products that bring revenue but little margin, and products that lose money after ads. Then adjust price, cost, shipping, bundle strategy, or ad spend.
FAQ
What is profit margin?
Profit margin shows profit as a percentage of revenue.
What is gross margin?
Gross margin usually compares revenue with direct cost of goods sold.
What is net margin?
Net margin includes more business costs and shows what remains after expenses.
Why can revenue be misleading?
High sales can still produce low or negative profit if costs are too high.
What margin is good?
It depends on industry, product type, overhead, and growth model.
Related guides and calculators
Educational note: CalcBeacon guides explain calculations and help you compare scenarios. They are not personal financial advice. For major borrowing, tax, pension, investment, or legal decisions, check the details with a qualified professional.