Average Profit Margin Per Industry & How to Calculate Them

Tracking profit margins is a simple way of measuring and seeking new methods of improving the profitability of a company. This is true no matter what industry the business is in or whether it is a brick and mortar shop or an online store.

However, measuring profit margins can involve complex calculations as this financial metric involves expenses such as raw materials, labor, and transportation costs. For businesses aiming to gain a better view of their financial strengths, understanding the average profit margins by industry can be a great place to start.

Types of Profit Margins

In the world of accounting, a profit margin separates a company's earnings from its revenue, business costs, and expenses.

Simply put, it shows what amount of a businesses' revenue is actually a profit and is expressed as a percentage. It is an important calculation for businesses to know as it can reveal how much profit is made from the sale of each product or service.

There are different types of profit margins that businesses can calculate and track. Each type reveals a different aspect of a company's financial health. The four main profit margin types include-

• Gross Profit Margin

This type of profit margin shows how much income is left after the direct expenses have been paid. Direct expenses include material, labor, and manufacturing costs, which is often called the cost of goods sold. It is important to remember that expenses like operating costs, taxes, and interests are not factored into the gross profit margin.

To work out the gross profit margin, businesses can subtract the cost of goods sold from the total revenue-

Gross Profit Margin = (Total Revenue Cost of Goods Sold) / Total Revenue x 100

• Operating Profit Margin

Another key calculation is the operating profit margin, which allows for more expenses to be considered. The operating profit margin signifies the success a company is having in allocating its resources. While the formula is similar to the gross profit margin calculation, it also includes operating expenses.

To figure out a company's operating profit margin, management can subtract the cost of goods sold and operating expenses from company revenue.

Operating Profit Margin = (Operating Income/Net Sales Revenue) x 100

• Pre-Tax Margin

This calculation shows the profit of a company prior to paying taxes. It can also help to compare profit margins over time to see what direction a business is heading towards.

Pre-Tax Profit Margin = (Earnings before taxes/Revenues) x 100

• Net Profit Margin

This is the profit margin that is worked out after all business expenses have been paid. To calculate this metric, organizations can add up all business expenses including taxes and interests paid, and subtract it from the revenue.

Net Profit Margin = (Operating Profit Interest Expenses Tax Expenses)/Revenue x 100

What is a Good Profit Margin?

Working out a company's profit margin is only useful if there is a standard to measure it against. The ideal profit margin can vary from industry to industry and is also dependent upon other unique circumstances such as location.

• Service Industries

Businesses that offer a service often have higher profit margins than other industries. Accountants and bookkeepers average an 18.4 percent profit margin. This can be attributed to the reality that no matter how well the economy is doing, people will always need help with taxes and bookkeeping.

Lawyers also have a high-profit margin with most averaging 17.4 percent. Low operating costs and the number of repeat clients contribute to the high-profit margin of attorneys.

• Real Estate

Landlords or those who lease property are often able to earn large profit margins. This covers businesses that rent apartments, houses, storage space, or mini-warehouses. They are usually on par with lawyers at 17.4 percent while real estate brokers or agents earn 14.8 percent.

• Health Industry

Dentists, doctors, and health care clinics are usually able to earn a good profit margin. This can be attributed to the demand for services as well as the number of repeat patients in need of ongoing healthcare.

While a dentist can have higher equipment costs, they often earn a 14.9 percent profit margin whereas the average physician earns 14.1 percent. Yet, outpatient care centers have average profit margins of 15.9 percent.

• Retail Industry

Most brick and mortar stores are on the lower end of the profit margin scale. Grocers average 2.5 percent while lawn and garden shops earn an average of 2 percent profit margin. On the higher end are building material and supplies centers with 3.2 percent profit margins, which is on par with car dealers.

Furniture or home furnishing stores usually see about 3.3 percent profit margins and alcohol stores often earn 3.4 percent. E-commerce businesses can earn higher profit margins with some reaching up to 6.5 percent.

Earning a healthy profit margin is a key indicator of a businesses' financial stability. High-profit margins can also be used as annual financial objectives for some companies. However, it is important to keep things in perspective and have a good understanding of the average profit margins to avoid straying too far from industry competitors.