What Is Profit Margin?
Profit margin is the percentage of revenue that remains as profit after subtracting costs. It tells you how much money you actually keep from every dollar you earn. A 30% profit margin means you keep $0.30 of every $1.00 in revenue -- the other $0.70 goes to costs.
There are two main types: gross profit margin (revenue minus direct costs) and net profit margin (revenue minus all costs including overhead). For freelancers, gross margin tells you if your pricing covers the direct cost of delivering work, while net margin tells you if your business is profitable overall.
Profit Margin vs Markup: The Difference
Margin and markup are often confused but they measure different things. Margin is profit divided by revenue. Markup is profit divided by cost. They always produce different numbers from the same data:
- If you buy something for $60 and sell it for $100: margin is 40% ($40/$100) but markup is 66.7% ($40/$60)
- A 50% markup always equals a 33.3% margin
- A 100% markup equals a 50% margin
- Margin can never exceed 100%, but markup can be any number
What Is a Good Profit Margin?
Profit margins vary significantly by industry and business type:
- Freelance services -- 50-80% gross margin is typical since your main cost is your time
- SaaS businesses -- 70-90% gross margins are common due to low marginal costs
- Retail and e-commerce -- 30-50% gross margin depending on product type
- Restaurants -- 3-9% net margin (one of the tightest in any industry)
For freelancers, a healthy net profit margin after all expenses (including taxes and health insurance) is 30-50%. If yours is below 20%, your rates may be too low or your expenses too high.