The net profit margin is a percentage that indicates how much revenue you’re left with after covering your expenses.
The net profit margin is essentially an indicator of how much profit a company earns from its total revenue after covering all expenses. The net profit margin expressed as a percentage, and the higher the percentage, the more profit your business is generating from sales.
If a company is able to manage its expenses well, by reducing costs or improving operational efficiency, it can boost its net profit margin
Economic downturns, rising material costs, or supply chain issues can negatively impact profit margins.
How to calculate net profit margin
To calculate the margin, you use this formula
(Net profit / revenue) × 100 = net profit margin
Net profit is what’s left after you’ve subtracted all costs—both direct costs and indirect costs—from your total revenue. This includes the cost of goods sold, operating costs, like salaries, rental costs and utilities, as well as interest on debt and tax.
Revenue is the total income you’ve generated from selling goods and services.
For example, if your business a net profit of $500,000 and total revenue of $2,000,000, the net profit margin would be:
(500,000 / 2,000,000) × 100 = 25%
A high net profit margin indicates good profitability, and means that your business is good at converting revenue into actual profit. A declining net profit margin could indicate issues like increasing costs or shrinking sales, while a rising margin could point to improved efficiency or you gaining better control over expenses.
What net profit margin should I have?
Net profit margins vary a lot by industry.
Here are some examples of good net profit margins:
- Tech companies often have higher margins, sometimes 20% or more, because they have relatively low operating costs, once the product is developed.
- Retail businesses might have lower margins, often around 5–10%, because they deal with high competition, higher operational costs, like inventory, and tighter pricing. Tighter pricing means they have less flexibility to increase prices—often because of high competition or price-sensitive customers.
- Manufacturing companies often have net profit margins in the range of 5–15%, but it can vary based on the cost of raw materials, labor costs, and other overheads.
It’s important to compare a company’s margin against its competitors or against the industry average to get a clear picture of its performance.