Understanding Profit Margins

Beginner: Margin in Plain English

Margin is the keep, not the take

Revenue is what you take in. Margin is what you keep out of it, said as a percentage. If you sell something for 100 dollars and keep 40 after costs, your margin is 40 percent.

Big revenue with a thin margin can lose to smaller revenue with a fat margin. A shop that sells 10,000 dollars and keeps 500 is doing worse than one that sells 4,000 and keeps 1,600. Margin tells you which is which.

The formula, once and simply

Margin equals profit divided by price, times 100 to make it a percentage. Sell for 50 dollars, keep 20 after cost, and margin is 20 divided by 50, which is 0.40, which is 40 percent.

That is the whole formula. The hard part is being honest about the cost you subtract, not the arithmetic.

Why the percentage beats the dollar amount

A dollar amount cannot be compared across products of different sizes. Ten dollars of profit is great on a 20 dollar item and terrible on a 500 dollar item.

Turning it into a percentage lets you line up every product and see which ones actually carry your business. The 20 dollar item at 50 percent margin might be quietly feeding you while the flashy 500 dollar item at 2 percent margin just keeps you busy.