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 net profit to total revenue, and it provides a realistic idea of a business’ 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 R100,000, and in order to make this amount of money, they have to spend R90,000. This means their profit is only R10,000. If company B’s total revenue is R50,000 and their total expense is just R10,000, it has a profit of R40,000. 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 R10,000 divided by R100,000, which is 10%. You can calculate company B’s profit margin by dividing R40,000 by R50,000, which gives you 80%. In other words, for each rand of their revenue, company A makes a profit of R0.10 and company B makes a profit of R0.80.