|Cost ($)||Margin (%)|
|Revenue ($)||Profit ($)|
What is Profit Margin?
Profit margin is the measure of profitability which is calculatd by dividing profit by revenue. For example, a 20% profit margin means there is $20 of net income for every $100 of revenue. The formula to calculate profit margin is:
Where, (Revenue – Cost) = Profit
Profit Margin represents the percentage of profit in the total revenue. For example, you sell an item for $10 with the cost of $8. Here, your profit is $10 – $8 = $2. So, the profit margin is ($2/$10)*100 = 20%.
In the above pie chart, the full circle represents the total revenue. The red portion shows the part of cost in revenue while the blue portion shows the part of profit which is profit margin.
So, the profit margin simply tells the percentage of profit in revenue.
In above example, if you sell the item at $12, then your profit is $4 and profit margin is ($4/$12)*100 = 33.33%, which is one third of the revenue. Increase in profit increases the profit margin.
Since, profit is measured in two ways, gross profit and net profit, profit margin is either gross profit margin or net profit margin depending on the type of profit used in calculation.
Why Profit Margin is always less than 100%?
Profit margin is 100% when revenue is equal to the profit. It means that you are selling something that costs zero to generate the revenue. This is an absurd case which is only possible when you are selling items you got for free like gifts.