Profit margin defined
Your profit margin is the amount of revenue left after paying for all the costs to deliver products or services. You can calculate this figure as a ratio of the net profit to the total revenue, and it provides a realistic idea of a business’s profitability.
If you strictly sell products, you can define product margin as the profit margin per product. If your company only offers services, you want to consider a wide range of factors, including the difference in hourly rates when you need to consult a senior employee versus an entry-level employee, direct and indirect costs, and marketing and administrative costs, to determine where you can cut costs.
Say company A has a total revenue of $100,000, and in order to make this amount of money, they have to spend $90,000. This means their profit is only $10,000. If company B’s total revenue is $50,000 and their total expense is just $10,000, it has a profit of $40,000. So despite having a lower revenue, company B is clearly more profitable than company A. But how much more profitable is company B?
The profit margin of company A in the previous example is $10,000 divided by $100,000, which is 10%. You can calculate company B’s profit margin by dividing $40,000 by $50,000, which gives you 80%. In other words, for each dollar of their revenue, company A makes a profit of $0.10 and company B makes a profit of $0.80.