In more detail
Margins are measured at several levels. Gross margin deducts only the direct cost of the goods sold; operating margin also deducts running costs such as salaries, rent and marketing; net margin deducts everything, including interest and tax. Each is profit divided by revenue (price), so a margin can never reach 100%. Typical margins differ hugely by industry: a supermarket and a software company are not comparable.
Why it matters
A healthy gross margin can hide a business that loses money once overheads are paid, and a price cut takes a much bigger share of profit than of revenue. Confusing margin with markup leads to systematic underpricing.
Example
A $100 sale of an item that cost $60 has a 40% margin, but a 66.7% markup. For a whole business:
| Line | Amount | Margin |
|---|---|---|
| Revenue | $500,000 | |
| Cost of goods sold | −$300,000 | |
| Gross profit | $200,000 | 40% |
| Operating expenses | −$150,000 | |
| Operating profit | $50,000 | 10% |
| Interest and tax | −$15,000 | |
| Net profit | $35,000 | 7% |
Common confusion
Margin divides profit by price; markup divides the same profit by cost.