Profit margin measures how much of each dollar of revenue becomes profit. The formula is: Margin = ((Revenue - Cost) / Revenue) × 100. For example, if you sell a product for $100 that costs $60 to make, your margin is (($100 - $60) / $100) × 100 = 40%.

There are three main types of profit margin: Gross margin measures profit after direct costs (materials, labor). Operating margin includes overhead expenses. Net margin is the bottom line after all expenses including taxes.

A healthy margin depends on your industry. Grocery stores operate on thin margins of 2-3%, while software companies often see margins of 70-80%. Understanding your margin helps you price products correctly and identify cost-cutting opportunities.

Margin and markup are often confused, but they measure different things. Margin is the percentage of the selling price that is profit. Markup is the percentage added to the cost to get the selling price.

The key insight: markup is always higher than margin for the same profit amount. A 50% margin equals a 100% markup. When setting prices, be clear about which metric you're using.

There are two ways to increase margin: raise prices or reduce costs. Raising prices works if you have pricing power — strong brand, unique product, or limited competition. Reducing costs requires operational efficiency.

Common strategies include: negotiating better supplier terms, automating manual processes, reducing waste, optimizing inventory, and focusing on higher-margin products. Even a 1% margin improvement can significantly impact profitability at scale.

Track your margins regularly. If margins are shrinking, investigate whether costs are rising or if you're discounting too heavily. Use this calculator to model different pricing scenarios and find your optimal price point.