Profit margin measures how much profit a business keeps from its revenue after accounting for costs. It expresses profitability as a percentage rather than an absolute number.
Why Profit Margin Matters
Profit margin is one of the clearest indicators of financial health and commercial discipline. It helps teams understand:
- How efficiently the business turns revenue into profit
- How pricing, cost, and discounting interact
- Which products, categories, or channels create the most value
- How resilient the business is to cost increases or demand shifts
- How much room exists for investment in growth, marketing, or innovation
A strong profit margin gives a business stability. A weak margin exposes fragility.
How Profit Margin Works
Profit margin is typically calculated as:
Profit Margin = Profit/Revenue
There are several types:
- Gross profit margin: after COGS
- Operating margin: after operating expenses
- Net profit margin: after all expenses, including tax
Example: If a business earns £1,000,000 in revenue and keeps £150,000 as profit, the profit margin is 15%.
Common Use Cases
- Pricing strategy: ensuring prices protect profitability
- Range planning: prioritising high‑margin products
- Cost management: identifying where efficiency is needed
- Channel strategy: comparing wholesale vs DTC economics
- Forecasting: modelling future profit scenarios
- Investment decisions: determining how much can be reinvested
Related Terms
- Gross Profit
- Gross Margin
- Net Profit
- COGS
- Markup
- Pricing Strategy
What Profit Margin Really Tells Us
Profit margin is often viewed as a financial scorecard, but it’s really a reflection of how well the business balances ambition with reality. It shows whether the value customers see in the product is strong enough to rise above the cost of creating and delivering it.
Falling margin can signal pressure: rising costs, heavier discounting, or a shift in customer behaviour that the business hasn’t yet adapted to.
What makes profit margin especially revealing is how it captures the quality of growth. Revenue can rise while margins quietly erode a sign that the business is growing in a way that isn’t sustainable. Conversely, a stable or improving margin often reflects thoughtful decisions: disciplined buying, intentional pricing, and a product experience that customers genuinely value.
At its core, profit margin is a measure of alignment. It shows whether the story the business tells, about quality, value, and experience, is matched by the economics behind it. When teams read profit margin not just as a percentage but as a narrative, they gain a clearer sense of where the business is thriving, where it’s stretched, and where the next smart adjustment lies.
