Gross margin shows production efficiency — is the core product profitable?
Operating margin shows business model efficiency — can you run the company profitably?
Net margin shows final owner returns after financing and taxes.
All three margins compressing together signals a systemic problem. A declining net margin with stable gross margin often points to rising SG&A (Selling, General & Administrative expenses) or interest costs.
Step-by-step guide to calculating net profit margin with formula, examples, and industry benchmarks.
Net Profit Margin Formula
Net Profit Margin = Net Profit / Revenue × 100
Net profit is revenue minus all costs: COGS, operating expenses, interest, and taxes.
Example Calculation
A company with $2M revenue, $800k COGS, $600k OpEx, $40k interest, and $140k taxes:
Gross Profit: $1,200,000
Operating Income: $600,000
Net Profit: $420,000
Net Profit Margin: 21%
Benchmarks by Industry
Industry
Net Margin Range
Software / SaaS
15–30%
Consulting
15–25%
Healthcare services
4–8%
Retail
2–5%
Restaurants
3–9%
Manufacturing
5–10%
Why It Matters
Net margin is the ultimate efficiency metric — it tells you what fraction of every revenue dollar actually flows to shareholders. A business with 40% gross margin but 2% net margin is losing efficiency somewhere in its cost structure.
Use the Net Profit Calculator to trace exactly where margin is lost across the income statement waterfall.
Understand the difference between gross profit and net profit, when each metric matters, and what they reveal about business health.
Gross Profit vs Net Profit
Both are profitability metrics, but they measure different things:
Metric
Formula
Tells You
Gross Profit
Revenue − COGS
Product/service unit economics
Operating Income
Gross Profit − OpEx
Business model efficiency
Net Profit
Operating Income − Interest − Taxes
Owner returns
When to Use Each
Gross Margin is best for:
- Comparing products or SKUs
- Benchmarking against direct competitors
- Unit economics and pricing decisions
Net Margin is best for:
- Overall business health assessment
- Investor and lender reporting
- Year-over-year performance tracking
Common Misconceptions
A high gross margin doesn't mean the business is profitable. Many high-growth companies have 70%+ gross margins but negative net margins because of heavy sales, marketing, and R&D spend. Gross margin shows the potential; net margin shows the reality.