The formula
Net profit margin is the share of each dollar of sales a business keeps as profit after every expense. Net income divided by revenue, times 100. That is the whole formula: net profit margin = net income ÷ revenue × 100. On the worked example — $180,000 of net income and $1,200,000 of revenue — the margin is 15.00%. You keep 15 cents from every dollar of sales, and the other 85 cents goes to the cost of goods sold, wages and rent, interest on loans, and tax.
Step 1 — Find the net income and revenue
Start with the net income, from the bottom of the income statement. Net income is what is left after ALL expenses — the cost of goods sold, wages and rent, interest on loans, and tax — not just the cost of goods sold. Then find the revenue, from the top of the same statement. On the worked example the net income is $180,000.00 and the revenue is $1,200,000.00. Use the same period for both numbers: a year of net income against a year of revenue.
Step 2 — Work out the margin
Divide the net income by the revenue, then multiply by 100: how many cents of profit the business keeps from each dollar of sales. On the worked example it is $180,000.00 ÷ $1,200,000.00 × 100 = 15.00%. That is the margin: 15 cents kept from every dollar. The same idea in reverse gives the net income the target needs: target margin ÷ 100 × revenue. For a 20.00% margin on the same revenue, the business must keep $240,000.00 — that is the “how much profit must I keep” number.
Step 3 — Check the result
Grocery and general retail often run 1 to 5 percent, restaurants 3 to 9 percent, professional services 10 to 20 percent, software and SaaS 15 to 25 percent or more, because software costs little to reproduce. On the worked example the margin is 15.00%, so the business sits at the top of the professional-services line and at the bottom of the software line. A margin near zero means the business barely keeps anything from its sales. Compare within an industry, not across them.
Three worked examples
The headline example: $180,000.00 of net income and $1,200,000.00 of revenue. The net profit margin is $180,000.00 ÷ $1,200,000.00 × 100 = 15.00%. The target example: how much profit must the business keep for a 20.00% margin. The net income needed is 20.00 ÷ 100 × $1,200,000.00 = $240,000.00 — $60,000.00 more than the $180,000.00 it keeps now. The reverse example: the smallest whole-dollar income for an 18.00% margin. It is $216,000; at $215,999 the income is $1 short of the $216,000 needed. Use the net profit margin calculator for your own numbers.
One reverse to check your answer
The smallest whole-dollar net income for the margin to reach 18.00% is $216,000 — at $216,000 the margin is 18.00%; at $215,999 the income is $1 short of the $216,000 needed. The net income needed for a 20.00% margin is $240,000.00. If your own numbers give a margin far from the one you expected, work the formula backwards: a wrong answer is usually a wrong input, and the most common mistake is using gross profit where the formula needs net income.
What net income is, and why it is after ALL expenses
Net income is the last line of the income statement: revenue minus the cost of goods sold, minus wages and rent, minus interest on loans, minus tax. Every one of those lines matters, because a business that looks profitable before interest and tax can still lose money after them — a loan taken out to buy the shop, or a tax bill that arrives late, turns a healthy operating result into a thin net one. That is why the net margin is the strictest of the margin measures: it is the profit that is actually left, after everything.
What a high margin means — and what a low margin means
A high margin means the business keeps a lot from each sale, and it usually needs less volume to survive: a luxury brand earns a lot per sale but sells few, and a software company earns a fat margin because each extra copy costs almost nothing to make. A low margin means the business keeps little from each sale, and it usually needs a huge volume to survive: a supermarket earns a few cents per dollar but sells a huge volume. A low margin is not always bad, and a high margin is not always good — a high margin on tiny sales is still a tiny profit. Judge the margin together with the revenue: the profit is the margin times the revenue.
Net margin vs gross margin
Gross margin uses gross profit, not net income: gross profit is revenue minus the cost of goods sold only, before operating expenses, interest and tax. On the worked example, $720,000 of cost of goods sold leaves $480,000 of gross profit, a 40.00% gross margin, against the 15.00% net margin — the gap is the operating costs, interest and tax, and it is 25 cents of every dollar. Gross margin is always higher than net margin for the same business. The two margins answer different questions: gross margin asks whether the product itself is priced right, and net margin asks whether the whole business is run right. A business can have a healthy gross margin and a thin net margin — and when it does, the problem is not the price, it is the costs. See the gross profit margin calculator and the guide to calculating gross profit margin, and the guide to calculating operating margin.
What to do when the margin is low
A 15.00% margin means each dollar of sales leaves 15 cents of profit. Lift it by raising prices where customers will pay, so the same sales bring more profit without more work. Cut costs that do not add value: a subscription nobody uses, a supplier charging more than the market, a product line that costs more to stock than it earns. Drop unprofitable products or clients, so the revenue that is left is the revenue that actually pays. The net income needed for a 20.00% margin is $240,000.00 — $60,000.00 more than the $180,000.00 the business keeps now.
How net margin differs from operating margin
Operating margin uses operating income, not net income: operating income is profit before interest and tax, so operating margin sits between gross margin and net margin. The three margins are a ladder: gross margin counts only the cost of goods sold, operating margin counts operating costs as well, and net margin counts everything, including interest and tax. On the worked example the net margin is 15.00%, and the gross margin is 40.00% — the operating margin sits somewhere between them.