Accounting

What Is a Good Profit Margin for a Small Business? (It Depends...)

Wondering if your profit margin is good, bad, or just weird? Here’s how to calculate it, compare it, and actually improve it.

Josh Mosher

Josh Mosher

— 4 min read
What Is a Good Profit Margin for a Small Business? (It Depends...)
That moment when your margin actually leaves room for a bonus and a burrito.

Published under The Accounting Hat on HatStacked.com

You’re looking at your income statement and wondering, “Is that... good?” If your profit margin feels like a mystery number cooked up by your accounting software, you’re not alone.

Let’s cut through the noise.

A “good” profit margin depends entirely on what kind of business you run, what you sell, and how many times you’ve screamed at your spreadsheet this month.

We’re not just going to throw a number at you and call it a day. Instead, we’ll walk through what profit margin really means, why yours might look weird, and how to figure out if it’s helping or hurting your business.

Wait, What Is Profit Margin Again?

Profit margin is the percentage of your revenue that turns into actual profit. It's what’s left over after you pay all the bills.

There are a few types, but here’s the big three:

  • Gross Profit Margin: Revenue minus cost of goods sold (COGS), divided by revenue
  • Operating Profit Margin: Includes expenses like payroll, rent, and software
  • Net Profit Margin: What you actually keep after taxes, interest, and the dreaded “miscellaneous”

Example:
If you sell $10,000 in a month and end up with $1,000 in net profit, your net profit margin is 10%.

Easy to say. Harder to keep.

What’s Considered “Good”?

Let’s get the number part out of the way.

  • Retail: 2–6% is common
  • Restaurants: 3–5%
  • Professional services: 15–30%
  • Software companies: 20% and up
  • Manufacturing: 5–10%

These are ballpark figures. Your real benchmark should come from your industry, your model, and your goals.

Logo_Transparent_small.png Related: Accounting Basics for Small Business Owners

Why Your Margin Might Look "Bad"

Just because your margin is lower than you want doesn’t mean you’re doing it wrong.

Here’s what could be affecting it:

  • You’re in growth mode and reinvesting
  • High COGS due to suppliers or materials
  • Too many discounts or underpriced offers
  • Fixed costs eating your revenue (like rent or payroll)
  • One-time expenses skewing the numbers

A bad month doesn’t mean a bad business. But if your margin is consistently thin and shrinking, it’s time to dig in.

How to Improve Your Profit Margin

Let’s fix it without breaking your business.

1. Raise Prices (Even a Little)

A 5% price increase can often do more than cutting 10% of your expenses.

If you’re afraid customers will leave, test small bumps. Your profit margin will thank you.

2. Reduce Cost of Goods Sold (COGS)

Can you:

  • Buy supplies in bulk?
  • Switch vendors?
  • Negotiate better terms?
  • Improve your production process?

Sometimes the problem isn’t sales. It’s what you’re spending to make them.

Logo_Transparent_small.png Related: The Inventory Hat: Why You're Probably Overbuying, Underselling, and Confused About Reordering

3. Cut Waste, Not Value

Look at:

  • Software you barely use
  • Marketing that never converts
  • Redundant subscriptions
  • Over-ordering supplies

Don’t cut what makes customers happy. Cut what nobody notices.

4. Improve Efficiency

If your team spends 20 hours doing something a robot could do in 2, that’s your margin leaking out the side.

Automate what you can. Streamline what you can’t.

5. Understand Your Break-Even Point

How much do you have to sell to cover your costs?

If you don’t know, you’re flying blind.
Once you hit that line, every sale becomes profit. Miss it, and every sale feels like treading water.

So... What Should Your Target Be?

If you’re running a:

  • High-volume, low-margin business (like retail), a small margin is expected
  • Low-volume, high-margin business (like consulting), you need strong pricing and low overhead
  • Subscription business, your margin improves over time as costs level out

Your “good” margin is one that supports:

  • Paying yourself
  • Paying your team
  • Saving for slow months
  • Growing without drowning in debt

And hopefully still having money left to buy printer ink.

Bottom Line

Don’t obsess over chasing someone else’s margin. Know your numbers, track them monthly, and focus on steady improvements.

The right profit margin is one that helps your business thrive, your team grow, and your accountant stop sending you passive-aggressive texts.

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