Profit margin measures how much profit you make on each dollar of sales. It's expressed as a percentage and shows the relationship between selling price, costs, and profit.
Interpretation: For every $1 of sales, you keep $0.40 profit after covering costs. This is a healthy margin for retail.
| Type | Formula | What It Shows |
|---|---|---|
| Gross Margin | (Revenue - COGS) / Revenue | Profit after direct costs only |
| Operating Margin | (Operating Profit) / Revenue | Profit after operating expenses |
| Net Margin | (Net Profit) / Revenue | Final profit after ALL expenses |
Common Confusion: Margin and markup are NOT the same!
| Metric | Formula | Based On |
|---|---|---|
| Profit Margin | (Profit / Selling Price) × 100 | Selling price |
| Markup | (Profit / Cost Price) × 100 | Cost price |
100% markup ≠ 100% margin!
100% markup = 50% margin
50% margin = 100% markup
Always clarify which you're discussing. Retailers often use markup, accountants use margin.
| Industry | Typical Gross Margin | Typical Net Margin |
|---|---|---|
| Software/SaaS | 75-90% | 15-25% |
| Consulting | 60-80% | 10-20% |
| Restaurants | 60-70% | 3-8% |
| Retail (general) | 30-50% | 2-5% |
| Manufacturing | 25-40% | 5-10% |
| Supermarkets | 20-30% | 1-3% |
| Construction | 15-25% | 3-6% |
Scenario: $1M revenue business
Current: 40% margin = $400,000 profit
After 5% improvement: 45% margin = $450,000 profit
Result: Small margin improvement = big profit increase (12.5% more profit)
Retail Store Product:
Question: Product costs $30. You want 60% margin. What price?
Current: $100 price, $60 cost, 40% margin, 1,000 units
After 10% Price Increase: (assume 5% volume loss)
Current: Same starting point
After 10% Cost Reduction: (negotiate supplier, efficiency)
| Product | Current Sales | Margin | Profit |
|---|---|---|---|
| Premium | $300,000 | 50% | $150,000 |
| Standard | $500,000 | 35% | $175,000 |
| Budget | $200,000 | 15% | $30,000 |
| Total | $1,000,000 | 35.5% | $355,000 |
After shifting 20% of budget sales to premium:
Scenario A: High Margin, Low Volume
Scenario B: Low Margin, High Volume
Fixed costs: $50,000/month, Variable cost per unit: $20, Selling price: $50
Impact of price change:
| Price | Contribution | Breakeven Units |
|---|---|---|
| $45 | $25 | 2,000 |
| $50 | $30 | 1,667 |
| $55 | $35 | 1,429 |
Higher prices reduce breakeven point, but may reduce total volume sold.
Analyzing profitability by product
| Product | Units | Revenue | Margin | Profit |
|---|---|---|---|---|
| Coffee drinks | 300 | $1,500 | 80% | $1,200 |
| Food | 80 | $960 | 58% | $557 |
| Total | 380 | $2,460 | 71% | $1,757 |
Strategy: Push coffee (80% margin) over food (58%). Staff upsell premium drinks. This is why cafes focus on excellent coffee.
Testing price points for maximum profit
| Price | Units/Month | Revenue | Cost ($30) | Profit | Margin |
|---|---|---|---|---|---|
| $49 | 1,000 | $49,000 | $30,000 | $19,000 | 39% |
| $59 | 800 | $47,200 | $24,000 | $23,200 | 49% |
| $69 | 600 | $41,400 | $18,000 | $23,400 | 57% |
| $79 | 420 | $33,180 | $12,600 | $20,580 | 62% |
Software-as-a-Service profitability model
| Item | Monthly | Annual |
|---|---|---|
| Revenue | $99,000 | $1,188,000 |
| COGS | $9,000 | $108,000 |
| Gross Profit | $90,000 | $1,080,000 |
| R&D | $30,000 | $360,000 |
| Sales/Marketing | $35,000 | $420,000 |
| Admin | $10,000 | $120,000 |
| Net Profit | $15,000 | $180,000 |
| Net Margin | 15% | |
Why SaaS margins are attractive:
Comparing business models
| Metric | Supermarket | Luxury |
|---|---|---|
| Revenue | $500M | $5M |
| Net Margin | 2% | 18% |
| Profit | $10M | $900k |
| Resilience | Low (thin margins) | High (fat margins) |
| Competition | Price-based | Brand-based |
Both models work, but require different strategies:
Supermarket: Needs huge volume, tight cost control, efficient operations. 1% cost increase wipes out 50% of profit!
Luxury: Needs brand strength, customer experience, pricing power. Can absorb cost increases easily.
Complete this quiz on Profit Margin
If you've found a bug, or would like to contact us please click here.
Calculate.co.nz is partnered with Interest.co.nz for New Zealand's highest quality calculators and financial analysis.
All calculators and tools are provided for educational and indicative purposes only and do not constitute financial advice.
Calculate.co.nz is proudly part of the Realtor.co.nz group, New Zealand's leading property transaction literacy platform, helping Kiwis understand the home buying and selling process from start to finish. Whether you're a first home buyer navigating your first property purchase, an investor evaluating your next acquisition, or a homeowner planning to sell, Realtor.co.nz provides clear, independent, and trustworthy guidance on every step of the New Zealand property transaction journey.
Calculate.co.nz is also partnered with Health Based Building and Premium Homes to promote informed choices that lead to better long-term outcomes for Kiwi households.
All content on this website, including calculators, tools, source code, and design, is protected under the Copyright Act 1994 (New Zealand). No part of this site may be reproduced, copied, distributed, stored, or used in any form without prior written permission from the owner.