What Profit Margin Actually Tells You
Revenue means nothing without knowing what it costs to generate. A business doing $1M in revenue with $950K in costs keeps $50K. That's a 5% net margin. Another business does $200K in revenue with $100K in costs and keeps $100K at a 50% margin. The second business is more profitable despite lower revenue.
Profit margin is the single best measure of whether a business is generating real money or just moving money around.
Gross Margin vs. Net Margin
Gross margin only accounts for direct costsβraw materials, manufacturing labor, shipping on products. It tells you whether your core product is priced right.
Net margin accounts for everything: rent, admin salaries, marketing, insurance, taxes, interest on debt. It tells you what the business actually keeps.
A high gross margin with a low net margin means your overhead is eating your profit. Worth investigating.
Benchmark Margins by Industry
| Industry | Gross Margin | Net Margin |
|---|---|---|
| Software / SaaS | 70-85% | 20-30% |
| Financial Services | 60-80% | 15-25% |
| Healthcare | 50-65% | 5-15% |
| Manufacturing | 25-35% | 5-10% |
| Retail (online) | 40-60% | 5-10% |
| Retail (brick & mortar) | 25-50% | 2-5% |
| Restaurants | 55-65% | 3-9% |
| Construction | 15-25% | 2-7% |