Having both good net and good gross profit margins is important for your business, but they come into play at different times. Learning how to calculate both gross and net profit margins and comparing them to your industry’s average to see if you have good or poor numbers are important ways to determine the financial health of your business.
- Good gross profit margins let you lower prices to win new customers, fend off competitive price wars, grow your business faster than the competition, and weather bouts of inflation.
- Good net margins let you attract investors, show lenders you can cover payments on a small business loan, hire more people, buy new equipment, and make other investments while still having profit left over.
A good net profit margin is over 8%, and a good gross profit margin is over 37%, which are the averages across all industries in the US according to this dataset from NYU. We’ve included their table at the end of this post so you can find yours based on your industry.
From there, you can look at your operations, marketing, and pricing strategies to increase your profit margin and gain competitive advantages.
| Margin | Formula | Why Margin Matters |
| Gross Profit Margin | (Revenue – COGS) / Revenue | Pricing strategies Absorb cost spikes Growth speed potential |
| Net Profit Margin | Net income / Revenue | You make more money Invest for growth Financing strategies |
A good net profit margin could be negative for some industries, like renewable energy companies with an industry average of almost -19%. This could be a result of high, non-cash depreciation expense, which is subtracted from revenue for calculating profit on paper, but cash is not taken out of the bank.
The Biotech industry may have negative net profit margins of -13% as they spend money developing drugs and new medicines through FDA trials. The negative net profit margin here is an industry standard and can be offset once the company has a new medicine that does clear FDA approval and goes to market.
Now that you know what a good profit margin is in general, let’s go into gross and net separately so you can compare yours to those of your competitors and industry averages.
Good Gross Profit Margins
Good gross profit margins are higher than net profit margins because they don’t account for non-COGS expenses where net profit margins are from your net income after these expenses are taken out.
Industries like the automobile space have high COGS and lower gross margins averaging 11.11% because they have product and manufacturing costs, while service businesses like software can have gross margins over 70% since they don’t have all of the industrial manufacturing costs.
Having a gross profit margin above your industry average is good because you keep a higher percentage of the profit for each product or service you sell than your competitors. With more money per sale, you can reinvest in your company and take the market advantage.
An example is having a gross margin of 50% while your industry average is 40%. If the average sales price of a single item is $100, here’s how much more you would make in gross profit after selling 1,000 items.
| You | Industry Average | |
| Gross Profit Margin | 50% | 40% |
| Revenue (1,000 x $100) | $100,000 | $100,000 |
| Gross Profit | $50,000 | $40,000 |
Your higher gross margin gives you $10,000 more gross profit that you can invest:
- Hire more sales representatives to sell even more products.
- Buy new equipment to lower your COGS and get an even better gross margin.
- Or drop it to your bottom line (after taxes).
A good gross profit margin also lets you offer discounts to win customers. If you dropped prices by 10% in the above example, you would have the same gross margin as the industry average. But since you’re now priced 10% below the competition, you’ll pick up more customers.
Good gross margins also get you through inflation periods without angering customers by raising prices. If costs increase by 10% but you don’t raise prices, you would still have a good gross profit margin of 45%. But the industry average would drop to 34%, which might not be enough for some competitors to stay in business. You could then pick up their customers and continue to gain market share.
Good Net Profit Margins
Good net profit margins are an indicator of how much money you have available and, just like gross profit margins, they vary across industries. Software has one of the highest at 27% and green energy the lowest under -18%.
Having a good net profit margin means you have enough money to hire more people, buy more advertising, invest more heavily in R&D, or execute new strategies to grow your business. It also makes your business more attractive to both investors and lenders, giving you a choice between debt or equity financing.
- Debt financing is like a standard loan as you’re taking on debt.
- Equity financing is receiving funding from investors who take part ownership in your company vs. you being in debt.
A good net profit margin lets you negotiate better terms with lenders because it shows you’re low risk and can cover loan payments without issue. It will also make you more attractive to equity investors, as they will earn better returns from businesses with good net profit margins. This is especially true for businesses looking to expand via angel investments or with a small business loan.
Assuming your contracts don’t prevent it, good net profit margins could allow you to pay off existing debt or buy back shares in the business from other investors. Paying off debt will boost future net profit margins since you will save on interest payments. If you are able to buy back shares from investors, you’ll keep all of the profits you would have owed them.
Having good profit margins gives you advantages for pricing, borrowing, investing, and growing. And when you’re ready for a working capital loan to stock up on high gross margin inventory during busy seasons, or you want a commercial construction loan for a new development, we’re ready to match you with tailored solutions.
If you’re curious about how your net and gross profit margins compare to your industry’s average, here’s the table we mentioned above.
Gross and Net Profit Margins by Industry
Here’s the table for gross and net profit margins by industry from the NYU dataset mentioned above.
| Industry Name | Gross Margin | Net Margin |
| Total Market | 37.11% | 8.67% |
| Total Market (without financials) | 32.39% | 7.33% |
| Advertising | 29.91% | 3.00% |
| Aerospace/Defense | 17.05% | 4.37% |
| Air Transport | 24.96% | 2.21% |
| Apparel | 54.28% | 2.98% |
| Auto & Truck | 11.11% | 3.77% |
| Auto Parts | 15.21% | 2.27% |
| Bank (Money Center) | NA | NA |
| Banks (Regional) | NA | NA |
| Beverage (Alcoholic) | 46.53% | 9.29% |
| Beverage (Soft) | 54.90% | 14.07% |
| Broadcasting | 39.84% | -5.64% |
| Brokerage & Investment Banking | NA | NA |
| Building Materials | 32.05% | 10.56% |
| Business & Consumer Services | 33.70% | 7.09% |
| Cable TV | 57.89% | 7.58% |
| Chemical (Basic) | 12.54% | 2.76% |
| Chemical (Diversified) | 16.47% | -0.50% |
| Chemical (Specialty) | 33.77% | 6.46% |
| Coal & Related Energy | 25.07% | 10.06% |
| Computer Services | 24.14% | 4.15% |
| Computers/Peripherals | 38.72% | 16.78% |
| Construction Supplies | 25.98% | 11.23% |
| Diversified | 36.46% | 25.15% |
| Drugs (Biotechnology) | 56.02% | -13.20% |
| Drugs (Pharmaceutical) | 70.30% | 8.90% |
| Education | 41.15% | 2.65% |
| Electrical Equipment | 30.09% | 2.59% |
| Electronics (Consumer & Office) | 37.48% | -15.37% |
| Electronics (General) | 25.19% | 5.62% |
| Engineering/Construction | 14.45% | 2.95% |
| Entertainment | 39.68% | -3.16% |
| Environmental & Waste Services | 35.79% | 8.81% |
| Farming/Agriculture | 14.70% | 4.90% |
| Financial Svcs. (Non-bank & Insurance) | 68.37% | 22.28% |
| Food Processing | 25.91% | 6.01% |
| Food Wholesalers | 15.36% | 1.34% |
| Furn/Home Furnishings | 28.50% | 2.11% |
| Green & Renewable Energy | 58.55% | -18.83% |
| Healthcare Products | 56.04% | 8.73% |
| Healthcare Support Services | 13.16% | 1.58% |
| Heathcare Information and Technology | 47.76% | 4.69% |
| Homebuilding | 24.97% | 12.00% |
| Hospitals/Healthcare Facilities | 38.25% | 6.97% |
| Hotel/Gaming | 61.37% | 9.80% |
| Household Products | 51.32% | 10.38% |
| Information Services | 33.82% | 6.23% |
| Insurance (General) | 36.83% | 4.16% |
| Insurance (Life) | 26.04% | 5.95% |
| Insurance (Prop/Cas.) | 28.24% | 9.88% |
| Investments & Asset Management | 63.89% | 17.59% |
| Machinery | 37.08% | 10.04% |
| Metals & Mining | 34.21% | 7.39% |
| Office Equipment & Services | 37.29% | 1.06% |
| Oil/Gas (Integrated) | 35.60% | 9.75% |
| Oil/Gas (Production and Exploration) | 58.78% | 19.52% |
| Oil/Gas Distribution | 46.68% | 16.24% |
| Oilfield Svcs/Equip. | 10.71% | 3.31% |
| Packaging & Container | 22.64% | 6.82% |
| Paper/Forest Products | 19.98% | 6.53% |
| Power | 41.63% | 11.30% |
| Precious Metals | 37.76% | -4.84% |
| Publishing & Newspapers | 47.91% | 2.26% |
| R.E.I.T. | 57.66% | 12.53% |
| Real Estate (Development) | 35.13% | 11.12% |
| Real Estate (General/Diversified) | 45.51% | 8.64% |
| Real Estate (Operations & Services) | 33.61% | -0.79% |
| Recreation | 38.81% | 0.65% |
| Reinsurance | 10.88% | 3.32% |
| Restaurant/Dining | 32.90% | 10.62% |
| Retail (Automotive) | 22.31% | 3.33% |
| Retail (Building Supply) | 34.15% | 8.08% |
| Retail (Distributors) | 30.82% | 6.45% |
| Retail (General) | 32.22% | 4.60% |
| Retail (Grocery and Food) | 26.09% | 1.97% |
| Retail (REITs) | 77.48% | 25.47% |
| Retail (Special Lines) | 30.39% | 1.49% |
| Rubber& Tires | 19.72% | -1.70% |
| Semiconductor | 58.59% | 19.96% |
| Semiconductor Equip | 45.35% | 20.14% |
| Shipbuilding & Marine | 27.71% | 10.52% |
| Shoe | 47.10% | 10.15% |
| Software (Entertainment) | 65.38% | 27.43% |
| Software (Internet) | 60.82% | -2.60% |
| Software (System & Application) | 72.38% | 22.94% |
| Steel | 15.61% | 5.25% |
| Telecom (Wireless) | 62.35% | 10.81% |
| Telecom. Equipment | 56.96% | 10.48% |
| Telecom. Services | 59.32% | 5.87% |
| Tobacco | 61.96% | 31.96% |
| Transportation | 23.17% | 4.09% |
| Transportation (Railroads) | 51.68% | 24.30% |
| Trucking | 20.72% | 4.20% |
| Utility (General) | 44.53% | 15.46% |
| Utility (Water) | 58.92% | 21.32% |
