Product margin
What is product margin?
Product margin refers to the profit a business makes on a specific product, calculated as the difference between its selling price and the costs associated with producing and selling it. It helps businesses understand how much money they’re earning from individual products once costs such as the cost of goods sold, manufacturing, and operating expenses are accounted for. Knowing the product margin allows businesses to identify which products are the most profitable and which might need price adjustments, cost reductions, or other strategic changes.
Profit margin: formula & definition
Product margin is different from overall profit margin, which measures the profitability of a business as a whole. Profit margin shows what percentage of a company’s revenue becomes profit after costs are deducted.
There are several types of profit margins:
- Gross profit margin (or gross margin): Revenue minus the cost of goods sold, expressed as a percentage of sales.
- Operating profit margin (or EBIT margin): Revenue minus operating expenses (like salaries, rent, and utilities).
- Pre-tax profit margin: Profit before tax as a percentage of revenue.
- Net profit margin (or net margin): Net profit divided by total revenue, showing the final profitability after all expenses and taxes.
Understanding profit margins helps businesses assess their financial health, plan pricing strategies, and improve long-term profitability.
