Profit margin is one of the most important metrics for any business. It tells you what percentage of your sales revenue is actual profit after covering all costs.

The Simple Formula

Profit Margin % = (Selling Price - Cost) ÷ Selling Price × 100

If you sell something for £100 that cost you £60 to make, your profit margin is 40%. That means 40p of every pound you earn is profit.

Why Profit Margin Matters

Many businesses focus on revenue ("We made £100,000 this year!") but ignore margin. A company with £100,000 in revenue and a 5% margin (£5,000 profit) is in a much weaker position than one with £50,000 revenue and a 40% margin (£20,000 profit).

Low margins mean:

• Small pricing mistakes hurt badly
• You need massive sales volume to survive
• Unexpected costs can wipe you out
• You have less cash to reinvest

High margins give you:

• Room for pricing experiments
• Buffer against cost increases
• More cash for growth
• Ability to offer discounts without panic

What's a "Good" Profit Margin?

It varies wildly by industry:

• Software/SaaS: 70-90% (low variable costs)
• Consulting/services: 20-50% (time-based, people costs)
• Retail: 5-20% (lots of competition, inventory costs)
• Restaurants: 3-10% (tight margins, high waste)
• Manufacturing: 10-30% (equipment, materials, labor)

Don't compare your café's margins to a software company's. Compare to similar businesses in your sector.

Common Mistakes

Mistake 1: Forgetting Overhead

Your product costs £20 in materials. You sell it for £50. That's not a 60% margin if you forgot rent, software, insurance, and your own salary.

Mistake 2: Confusing Margin and Markup

A 50% margin is NOT the same as a 50% markup (see our guide on margin vs markup).

Mistake 3: Ignoring Hidden Costs

Payment processing fees, returns, damaged goods, and "free" shipping all eat into your margin.

How to Improve Profit Margin

1. Raise prices (test carefully)

2. Cut costs without cutting quality

3. Add higher-margin products/services

4. Reduce waste and inefficiency

5. Bundle products (higher perceived value)

6. Target customers willing to pay more

The most successful businesses obsess over margin. Revenue is vanity. Profit is sanity. Margin is clarity.