A 50% profit margin means if you spend $1 to earn $2, that’s a 50 percent profit. For a small business, a healthy profit margin tends to range from 7% to 10%. However, profit margins vary by industry. For example, retail and food companies often have lower margins due to higher overhead costs. In contrast, consulting companies may see 80% or higher profit margins, sometimes exceeding 100% to 300%.
As a general rule, 5% is considered a low margin, 10% a healthy margin, and 20% a high margin.
Calculating Profit Margin
Charging a 50% markup ensures covering production costs and earning a profit. A 100% markup equals a 50% margin.
To calculate profit margin, subtract costs from revenue, then divide the gross profit by revenue. For example:
- Cost to produce an item: $100
- Selling price: $150
- Gross profit: $50
$50 divided by $150 revenue equals a 33% profit margin.
Accounting for Taxes
Saving 30% of profits for taxes works well for new businesses. An accountant can advise on accurate tax amounts, or learn small business accounting fundamentals.