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E-commerce Net Margin
profitabilityThe percentage of revenue that remains as profit after all expenses, including operating costs, interest, taxes, and depreciation, have been deducted.
Definition
Net margin is the ultimate measure of profitability. It answers the question: for every dollar of revenue, how many cents actually become profit? A 15% net margin means the business converts $0.15 of every revenue dollar into bottom-line profit. This metric accounts for everything: production costs, salaries, rent, marketing, interest payments, and taxes.
Net margins vary widely by industry. Technology companies may achieve net margins of 20-35%. Retail and food service businesses often operate with net margins of 2-5%. Financial services can reach 25-30%. Comparing your net margin to industry averages reveals whether your business is operationally efficient or leaving profit on the table.
A business can have excellent gross margins but poor net margins, which signals that operating expenses are consuming too much revenue. Conversely, a business with thin gross margins can still be profitable if operating expenses are lean. Analyzing the waterfall from gross margin to operating margin to net margin reveals exactly where in the business money is being spent.
Formula
Net Margin = (Net Income / Revenue) x 100 Example
A consulting firm generates $2,000,000 in annual revenue. After all expenses (salaries: $1,100,000, rent: $120,000, software: $40,000, marketing: $80,000, taxes: $132,000, other: $128,000), net income is $400,000. Net margin = $400,000 / $2,000,000 x 100 = 20%.
Related Terms
Gross Margin
profitabilityThe percentage of revenue remaining after subtracting the direct costs of producing goods or services (COGS). It measures production efficiency before operating expenses.
Operating Margin
profitabilityThe percentage of revenue remaining after deducting all operating expenses, but before interest and taxes. It measures the profitability of core business operations.
Net Profit
profitabilityThe total profit remaining after all expenses have been deducted from revenue, including COGS, operating expenses, interest, taxes, and any other costs. Also called the bottom line.
EBITDA
profitabilityEarnings Before Interest, Taxes, Depreciation, and Amortization. A measure of a company's operating performance that removes the effects of financing, accounting, and tax decisions.
Put It Into Practice
Use these calculators to apply net margin to your own numbers.
Profit Margin Calculator
Calculate gross, operating, and net profit margins.
Open calculator →Gross vs Net Margin Calculator
Compare gross margin, operating margin, and net margin side by side to see where your profits go.
Open calculator →Operating Expense Ratio Calculator
Calculate your operating expense ratio with industry benchmarks and savings opportunities.
Open calculator →