What Is a Good Profit Margin for a Small Business?
There isn't one magic number. A "good" profit margin depends heavily on your industry, your size and which margin you're looking at. As a very rough rule of thumb, many small businesses see a net profit margin somewhere around 5–10%, anything consistently above 10% is generally healthy, and 20% or more is strong. But a grocery shop with a 3% net margin can be doing well, and a consultancy on 10% might be underpricing.
First, which margin?
- Gross margin = (revenue − cost of goods sold) ÷ revenue. It tells you how profitable each sale is before overheads.
- Operating margin subtracts running costs like rent, wages and marketing.
- Net margin is what's left after everything, including interest and tax.
Comparing your gross margin to someone else's net margin is how people get unnecessarily worried, or unjustifiably relaxed. We break the three down in gross margin vs net margin.
Rough benchmarks by type of business
| Business type | Typical gross margin | Typical net margin |
|---|---|---|
| Grocery and convenience | Low (roughly 20–30%) | Very thin (often 1–3%) |
| Restaurants and cafés | Moderate | Thin (often low single digits) |
| General retail / e-commerce | Often 30–50% | Low to mid single digits up to ~10% |
| Trades and construction | Varies widely | Often mid single digits to ~10% |
| Professional services | High | Often 10–20%+ |
| Software / digital products | Very high (70%+) | Can be 20%+ once established |
Treat these as ballpark ranges only. Industry averages vary by country, year and data source, and averages hide huge variation. For US sector data, NYU professor Aswath Damodaran publishes margins by industry each year, which is a useful free reference.
A better question: is your margin enough?
Benchmarks are interesting, but your margin needs to do three jobs:
- Pay you a fair wage for your time, separately from profit.
- Cover a bad month or two without borrowing.
- Fund growth: new stock, equipment, marketing.
If your net margin looks "good" only because you aren't paying yourself, it isn't good. Put a realistic salary into your costs, then recalculate.
How to calculate yours
For a single product, the profit margin calculator gives gross margin and markup from your cost and price. For the whole business, take a period, say last quarter:
- Revenue: £60,000
- Cost of goods: £33,000 → gross margin 45%
- Overheads including your pay: £21,000 → operating profit £6,000
- Operating margin: 10%
Ways to improve a thin margin
- Raise prices, carefully. A 5% price rise with no drop in volume goes almost entirely to profit. Test it on new customers or new products first.
- Know your true costs. Card fees, shipping, returns and platform fees are often underestimated. See cost-plus pricing.
- Cut low-margin products. Look at margin by product, not just revenue. Some best-sellers barely make money.
- Negotiate with suppliers or order in larger, less frequent batches.
- Increase average order value with bundles, add-ons or free-shipping thresholds.
- Fix overheads that don't earn their keep: unused software subscriptions are a classic.
Don't confuse margin with cash
A business can be profitable on paper and still run out of money if customers pay slowly or stock ties up cash. Watch your bank balance and payment terms as closely as your margin. And know your break-even point, the sales you need each month just to cover fixed costs; here's how to calculate it.
Frequently asked questions
What is a good profit margin for a small business?
It varies by industry, but a net margin of around 5–10% is common, above 10% is generally healthy and 20% or more is strong. Grocery and restaurants often run much thinner margins.
What is the difference between gross and net profit margin?
Gross margin only subtracts the direct cost of goods sold; net margin subtracts all costs, including overheads, interest and tax.
How can I increase my profit margin?
Raise prices where you can, cut low-margin products, negotiate supplier costs, reduce unnecessary overheads and increase average order value.
Should I include my own salary when calculating margin?
Yes. Including a fair wage for your time gives a realistic picture of whether the business is truly profitable.