What Is a Good Profit Margin for a Small Business?

"Is a 20% profit margin good?"

I get some version of this question every week. And the honest answer is: it depends entirely on what kind of business you run, which type of margin you're talking about, and what stage you're at.

A 20% net margin at a grocery store would be unheard of. A 20% net margin at a software company would be below average. The number means nothing without context. So let's add some context.

Three Types of Profit Margin

There isn't just one "profit margin." There are three, and each one tells you something different about your business.

Gross Profit Margin

Gross Margin = (Revenue - Cost of Goods Sold) / Revenue x 100

This measures how much you keep after paying for the direct costs of delivering your product or service. If you sell a candle for $25 and the wax, wick, jar, and label cost you $7, your gross profit is $18 and your gross margin is 72%.

Gross margin tells you whether your core product is priced right relative to what it costs to produce. It says nothing about whether the business overall is profitable, because it doesn't include rent, salaries, marketing, or any other overhead.

Operating Profit Margin

Operating Margin = (Revenue - COGS - Operating Expenses) / Revenue x 100

This is gross profit minus all the costs of running the business: rent, payroll, marketing, insurance, software, everything except interest on debt and taxes.

Operating margin tells you whether the business itself is profitable from its operations, before financing and tax considerations. It's the purest measure of how well you're running the shop.

Net Profit Margin

Net Margin = Net Profit / Revenue x 100

This is the bottom line. Revenue minus everything: COGS, operating expenses, interest, taxes. What's left after every bill is paid.

Net margin is what most people mean when they say "profit margin." It's the percentage of every dollar in revenue that you actually get to keep.

Industry Benchmarks

Here's where the "good" question gets interesting. According to NYU Stern School of Business data and various SBA reports, net profit margins vary enormously by industry.

High-margin businesses (15%+ net margin):

• Accounting and bookkeeping: 18-25%
• Legal services: 15-25%
• Software and SaaS: 20-30%
• Consulting: 15-25%
• Financial advisory: 20-30%

Mid-range margins (5-15% net margin):

• General contracting: 5-10%
• Manufacturing: 5-10%
• Healthcare services: 10-15%
• E-commerce: 5-12%
• Fitness and wellness: 10-15%

Low-margin businesses (under 5% net margin):

• Restaurants: 3-6%
• Grocery stores: 1-3%
• Retail (brick and mortar): 2-5%
• Transportation and trucking: 3-7%
• Auto repair: 3-6%

These are general ranges based on published industry data. Your specific numbers will vary based on location, scale, pricing strategy, and dozens of other factors. Use them as a reference point, not a grade.

If your net margin is below your industry's range, it doesn't necessarily mean you're doing something wrong. You might be in a growth phase, investing in equipment, or building a team. But if you're consistently below the range and you're not actively investing for growth, something needs to change.

The Markup vs. Margin Confusion

This trips up more business owners than almost any other financial concept. Markup and margin are not the same thing, and confusing them can cost you thousands.

Markup is calculated on cost. If something costs you $60 and you add a 50% markup, you sell it for $90.

Margin is calculated on the selling price. That same $90 item with a $60 cost has a 33% margin ($30 profit / $90 selling price).

Same transaction. Same dollar profit. But 50% markup and 33% margin are very different numbers. I've seen business owners who thought they were making 40% margins when they actually had 40% markups, which translates to about 28.6% margins. Over a year of sales, that misunderstanding can mean tens of thousands of dollars in pricing errors.

Quick conversion: if you know your markup and want your margin, use this formula:

Margin = Markup / (1 + Markup)

So a 50% markup (0.50) = 0.50 / 1.50 = 33.3% margin. A 100% markup = 50% margin. A 200% markup = 66.7% margin.

If you want to verify your numbers, our Markup vs. Margin Calculator converts between the two instantly.

How to Improve Your Margins

If your margins are thinner than you'd like, there are only two paths: increase revenue per unit or decrease costs per unit. Everything else is a variation of one of those.

Raise Prices Strategically

This is the fastest path to better margins and the one owners resist the most. If you haven't raised prices in the last year, you've effectively taken a pay cut thanks to inflation. Even a 5-8% increase can meaningfully improve your bottom line.

The fear is always "I'll lose customers." Some businesses will lose a few. But consider: if your net margin is 10% and you raise prices 10%, you can afford to lose up to half your customers and still make the same profit. Most price increases cause nowhere near that level of churn.

For a deeper look at pricing strategy, check out our guide to pricing services in 2026.

Reduce Cost of Goods Sold

Negotiate with suppliers. Buy in larger quantities if cash flow allows. Switch materials where quality isn't affected. Review vendor contracts annually, because the price you got three years ago might not be the best price available today.

For product businesses, even a small reduction in per-unit cost compounds across thousands of sales. Saving $0.50 per unit on 10,000 units is $5,000 straight to your bottom line.

Cut Overhead Thoughtfully

Go through every recurring expense and ask: is this directly contributing to revenue or operations? Cancel what isn't. Renegotiate what is.

Common places to find savings:

• Software subscriptions you've outgrown or rarely use
• Office space that's larger than you need (especially post-2020)
• Insurance policies that haven't been re-quoted in years
• Redundant services from different vendors

Be careful with cuts that affect quality or capacity. Cutting your marketing budget might save money this quarter and cost you revenue next quarter. Cut fat, not muscle.

Improve Operational Efficiency

If your team spends 3 hours on a task that should take 1, that's margin leaking out. Look for bottlenecks, redundant processes, and manual work that could be automated or eliminated.

This doesn't require expensive software. Sometimes it's as simple as batching similar tasks together, creating templates for recurring work, or eliminating unnecessary approval steps.

Your Margin Tells a Story

A single margin number is a snapshot. The trend is what matters.

If your margin is 8% but it was 5% two years ago, you're heading in the right direction. If it's 15% but was 22% last year, you have a problem to investigate, even though 15% might look fine on paper.

Track your margins monthly. Use your P&L statement to calculate them, or run the numbers through our Profit Margin Calculator. Watch for trends over time, and investigate any month where your margin drops more than a couple of percentage points from the norm.

The businesses that protect their margins during periods of rising costs are the ones that survive long-term. Know your numbers, know your industry, and know where your margin stands relative to both.