What Is a Good Profit Margin?

Before you can figure out what is a good profit margin, you need to understand how this important metric works. Profit margin refers to the ratio between your profits and your sales. Earning lots of money is always great, but if it costs an equal lot of money to make that happen, you’ll need to scrutinize the process to see where you can make improvements.

Here’s the formula for profit margin:

((sales – total expenses) ÷ revenue) x 100

Once you’ve crunched the numbers, you’ll need to gather a bit more information before knowing if your profit margin is good. This is because profit margins vary from industry to industry. For example, the owner of a furniture store might be thrilled with a 10% profit margin. But if a software company had a similar profit margin, the owners would likely be concerned because the software industry typically has much higher margins.

What matters most is that your profit margin is at or above your industry average. Take the time to understand the average profit margin your business can expect given its industry, then seek to exceed that percentage every quarter. If you can do this, you’ll always have what can be considered a high profit margin.

Speaking in general terms, most businesses will feel good about their profit margin as long as it’s at least 15–20%. But those figures may not be relevant, depending on the standard in your unique industry. When your profit margin is high, you know that your processes are working. You are managing to keep expenses in check and carry out your operations efficiently. And further refinement could yield an even higher margin. This is why it’s important to continually monitor your margins, watching for trends. Your goal should be year-over-year improvement.

Just remember that at its core, your profit margin represents your profits. The higher you can drive it, the more money will stay in your pocket. Many diverse factors affect your margins, but that simple formula will help to give you a powerful litmus test for where you stand.