What Is Net Profit Margin?
Net profit margin is what's left after every cost has been paid. The ultimate measure of whether a business is actually making money.
Key Takeaways
- Net profit margin = Net Profit ÷ Revenue × 100.
- It accounts for all costs: COGS, overheads, interest, and tax.
- A healthy net margin for SMEs varies by sector — 5–15% is typical for product businesses.
What net profit margin measures
Net profit margin tells you what percentage of each pound of revenue you actually keep after paying every expense — suppliers, staff, rent, marketing, loan interest, and tax. It's the bottom line in every sense: if this number is negative, your business is losing money regardless of how much revenue it generates.
Gross margin vs net margin
Gross margin subtracts only the direct cost of what you sold. Net margin subtracts everything. A business can have a healthy 50% gross margin but a negative net margin if its overheads are too high. Tracking both tells you whether a problem is in your product economics or your cost structure.
Typical benchmarks
Net margins vary enormously by sector. Software businesses can achieve 20–30%+. Product eCommerce businesses typically run 5–15%. Low-margin retail or wholesale may run 1–5%. The key is not to compare yourself to an arbitrary standard but to understand what is achievable in your sector and track your trend.
How to improve net margin
Improve gross margin (see the gross margin article), reduce fixed overheads (renegotiate rent, consolidate tools), reduce variable costs (negotiate better terms), and grow revenue without proportionally growing costs. The last point — operational leverage — is the fastest route to margin expansion.