Margins are one of the most important — and misunderstood — numbers in business.
Many founders look at revenue and think, “We’re doing great!” But revenue alone doesn’t tell the full story. What really matters is how much of those sales you actually keep. That’s where understanding business margins becomes critical.
In this post, we’ll break down how to understand business margins, why they matter, and how they can help you make smarter decisions for growth.
What Are Business Margins?
Simply put, your margin is the percentage of revenue that remains after costs. It tells you how efficient and profitable your business really is.
There are three common types of margins every founder should understand:
Gross Margin
Formula: (Revenue – Cost of Goods Sold) ÷ Revenue
This shows how much profit you make after covering direct costs (like materials, product costs, or manufacturing).
Operating Margin
Formula: (Operating Income ÷ Revenue)
This factors in overhead like payroll, rent, and marketing. It reveals how efficient your business is at running day to day.
Net Margin
Formula: (Net Profit ÷ Revenue)
This is the “bottom line” — what’s left after all expenses, including taxes and interest.
Understanding these margins gives you a layered view of your financial health.
Why Margins Matter More Than Revenue
Two businesses can both generate $1 million in revenue — but one might have a 40% margin, while the other runs at 5%. The difference is night and day.
Here’s why margins matter:
They show profitability. High revenue without healthy margins often leads to cash flow problems.
They drive smarter pricing decisions. If margins are too thin, even strong sales won’t sustain growth.
They help with funding. Investors and lenders always look at margins to judge financial stability.
They reveal scalability. A strong margin means your business can grow without burning out financially.
When you learn how to understand business margins, you shift your focus from chasing sales to building sustainable profit.
Step 1: Know Your Costs
Margins are only as accurate as your cost tracking. Start by separating:
Fixed costs: Rent, salaries, insurance — expenses that don’t change with sales volume.
Variable costs: Inventory, shipping, commissions — expenses that rise as sales increase.
This clarity helps you calculate gross margin correctly and spot hidden cost leaks.
Step 2: Calculate Your Margins Regularly
Margins aren’t “set it and forget it.” They change as your costs, pricing, or sales channels shift. A good habit is to review margins:
Monthly for gross and operating margins.
Quarterly for net margins (when taxes or seasonal swings hit).
Even small changes — like a supplier raising prices — can eat away at margins without you noticing.
Step 3: Compare Margins by Product or Channel
A common founder mistake is averaging margins across the entire business. The truth? Some products, services, or sales channels are much more profitable than others.
For example:
Product A might have a 60% margin.
Product B might have a 15% margin.
If you don’t track this, you might push growth in the wrong areas. By segmenting margins, you’ll see which parts of your business actually drive profit.
Step 4: Benchmark Against Industry Standards
What’s a “good” margin? It depends on your industry:
Ecommerce/DTC: Gross margins often range from 30–60%.
Professional services: Operating margins of 20–30% are strong.
Wholesale/distribution: Margins may be slimmer, around 10–20%.
By benchmarking, you can see whether your business is competitive — or if you need to adjust pricing or costs.
Step 5: Improve Margins Strategically
Once you know your numbers, you can take action to improve them:
Raise prices (when justified by value).
Negotiate better terms with suppliers.
Reduce waste in operations or inventory.
Focus on high-margin products and scale back low-margin ones.
Automate or outsource to cut overhead.
Improving margins is often the fastest way to strengthen cash flow and profitability without needing more sales.
Step 6: Use Margins to Guide Decisions
Margins shouldn’t just sit on a report — they should guide your daily choices. Ask:
Can we afford this hire based on our operating margin?
Will this marketing spend improve gross margin, or just revenue?
Should we double down on the channels with higher profitability?
Margins aren’t just finance metrics — they’re decision-making tools.
Final Thoughts
Learning how to understand business margins is one of the most powerful skills a founder can develop.
Margins show you what’s really happening beneath the surface of your revenue. They highlight strengths, expose weaknesses, and help you grow with confidence.
If you’ve been focused only on sales, it might be time to shift your attention to margins. Because at the end of the day, revenue is vanity — but margins are sanity.
Want to take the pulse of your business? Try our free Profit Pulse assessment.