Gross profit margin is a metric that defines the percent profit that a company makes for every dollar of goods produced. That is, the profit to the company after all material and labor production costs. For example, a company that sold $2 million worth of products that had a total cost of $1.6 million to produce made $400,000 gross profit, or a 20 percent gross profit margin (400,000 / 2,000,000 = .20).
Profit Margins Vary Dramatically by Industry
Typical gross profit margins vary significantly by industry and type of business. Gross profits margins in the pharmaceutical industry typically range from 50 to 100 percent, and in the textile manufacturing industry margins average around 40 to 45 percent, but most major retailers only have a gross profit margin in the 20 to 30 percent range (and net profit can be as little as 2 percent according to the Michigan Retailers Association).
Good Profit Margin for an Independent Restaurant
The average independent restaurant has a gross profit margin of around 58 percent according to marketing and sales expert Paul Weyland, so any margin above 65 percent would have to be considered good for that sector of the restaurant business.
Good Profit Margin for a Grocery Store
Weyland lists the average grocery store gross profit margin at 20 percent, so if a grocery store can manage a 25 percent gross margin, it would be significantly more profitable than average.
Good Profit Margin for a Biotechnology Company
The top 25 biotechnology companies with the highest gross profit margins all had margins of at least 80 percent according to the Y Charts website, and the top 10 all had margins of greater than 92 percent, so it is probably fair to say that a profit margin of 75 percent or greater is good for a company in that sector.
Net profit margin is more important in the long run than gross profit margin, however gross profit margin is easier and simpler to determine. As long as your net profit margin is above zero, then your gross profit margin is good enough to be profitable. If you can take the time to determine both profit margins, then it will be easier to determine what a good gross profit margin is for you.
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