What is Profit Margin?
Profit margin is one of the most critical KPIs for any UK business, from freelancers to large corporations. It measures how much of every £1 in sales your company actually keeps after paying costs.
Gross Profit vs. Net Profit
Understanding the difference is key to managing your business effectively:
- Gross Profit Margin: Focuses purely on production efficiency. It looks at how much money is left after direct costs like materials and labour (COGS).
- Net Profit Margin: The"bottom line." This subtracts everything—rent, marketing, salaries, and insurance (OpEx). It tells you how truly profitable the whole business is.
How to improve your margin
If your margins are low, you have two primary levers:
- Increase Price: Use our Pricing Assistant above to find your target price.
- Reduce Costs: Negotiate with suppliers or optimize your workflow to lower COGS.
Example Calculation
"A UK ecommerce shop sells a widget for £50. The widget costs £20 to buy and ship (COGS). Monthly rent and ads average £10 per widget (OpEx)."
Revenue: £50
Gross Profit: £50 - £20 = £30 (60% Margin)
Net Profit: £30 - £10 = £20 (40% Margin)
FAQ
What is the difference between gross and net profit margin? expand_more
Gross margin only looks at direct costs of the product. Net margin looks at the entire cost of running the business, including overheads like rent and utilities.
How do I calculate the price to achieve a target margin? expand_more
Divid your Cost of Goods Sold (COGS) by (1 minus your target margin decimal). For example, for a 40% margin, divide COGS by 0.6.
What expenses should I include in my profit calculation? expand_more
Include all recurring costs: business insurance, website hosting, marketing spend, accountancy fees, and any staff salaries. Don't forget to account for your own time!