Gross Margin Versus Net Margin: Essential Insights
This article will explain how to calculate your business’s profitability based on gross and net profit margins.
In the end, you will understand gross margin versus net margin differences and their roles. Let’s take a closer look at each.
Gross Profit Margin and Gross Profit Explained
Gross profit margin is calculated as the ratio of gross profit to revenue multiplied by 100%. Gross profit is the difference between revenue and the cost of sales.
Ideally, the gross profit margin should exceed 70%, regardless of the industry your business operates.
You can calculate the gross profit margin for different products to identify the most profitable ones and boost your business’s overall profitability in the future.
However, if you resell products like t-shirts or other items purchased from a wholesale vendor and sold through a typical e-commerce shop, it is often difficult to achieve a gross profit margin of more than 50%. In such cases, 50% is acceptable, but reaching 70% would be excellent.
Net Profit Margin and Net Profit Explained
The second key financial metric is the net profit margin, calculated as the ratio of net profit to revenue multiplied by 100%.
Net profit is the amount remaining after subtracting all expenses from revenue.
A net profit margin of over 30% is considered ideal, regardless of the industry.
If you resell products, your net profit margin is typically below 20%. However, achieving 30%, even in an e-commerce business, is an excellent result.
YouTube Video: Gross Margin Versus Net Margin
Watch this article’s key insights in a 5-minute video explaining the difference and focus of gross margin versus net margin:
- calculation;
- showing what profit margin is good.
Gross Margin Versus Net Margin In Practice
Let’s discuss why high profitability matters in the financial analysis of gross margin versus net margin.
A 30% net profit margin means your revenue is composed of 70% expenses and 30% profit, ensuring high profit security.
This stability supports reinvestment, growth, preparedness for unexpected challenges, and long-term success.
In contrast, low profitability increases the risk of losses. Unexpected market events could lead to financial losses for your business.
This is why understanding your business’s profitability – both gross profit margin and net profit margin – is crucial.
With high profitability, you need to sell fewer goods or services to achieve your desired net profit. This reduces the effort required to reach your financial goals.
Which Is More Important, Gross or Net Profit Margin?
So, to sum up,
Gross profit margin reflects product profitability, helping businesses identify the more profitable ones by focusing on those with a higher gross profit margin.
On the other hand, net profit margin shows overall business profitability, indicating the company’s financial health after all expenses are deducted.
On the other hand, net profit margin shows overall business profitability, indicating the company’s financial health after all expenses are deducted.
Free Net Profit Margin Calculator
In addition, I recommend using the free financial planning calculators to calculate your business’s net profit and net profit margin, whether planned or actual.
Simply go to the calculators page, select your business type, and enter initial data such as prices, cost of sales, and fixed expenses.
You’ll receive a financial plan that includes a three-year profit and loss forecast, net profit margin calculations, and visual charts and graphs.
FAQ: Gross Margin Versus Net Margin Explained
About the Author
Kateryna Moskovenko
Financial Consultant with 14 years experience in accounting, management accounting, and financial modeling; Founder of Fiscra; Author of courses and trainings in financial modeling, business planning, and entrepreneurship; prepared more than 50 financial models for startups.
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