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profit margin

Contributor(s): Ivy Wigmore

A profit margin is the difference between what it costs a business to get a product or service to market and the price it charges for it. Profit margins are also calculated for companies to quantify the difference between multiple profit / loss elements on an income statement.

The profit margin is a profitability ratio. To calculate the net profit margin for a company, you divide the figure for net income by the figure for revenue (also known as gross income).  Other types of profit margins in a business include the gross profit margin (gross profit divided by revenue), operating margin (operating profit divided by net sales) and pretax profit margin (pretax earnings divided by total sales). Similarly, the profit margin for a product or service can be calculated by dividing the unit cost of production by the unit sales price.

Profit margin is usually expressed as a percentage, which converts directly to a dollar value quantifying how much of each dollar of sales or revenue is actually profit. A profit margin of 25 percent, for example, means that 25 cents of each dollar taken in is profit.

This was last updated in August 2018

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