How Profit Margins Work

Gross profit = revenue − COGS; operating profit subtracts operating expenses; net profit subtracts everything else including taxes. Each margin divides its profit level by revenue. Markup divides gross profit by COGS instead — so a 50% markup on a $60 cost yields a $90 price, which is a 33.3% margin.

Worked Example

$100,000 of revenue with $60,000 COGS, $15,000 operating expenses, $5,000 other, and $5,000 tax: gross margin 40.0%, operating margin 25.0%, net margin 15.0%, and a 66.7% markup on COGS.

Reading the Three Margins

A healthy gross margin shows your product pricing works; a thin operating margin reveals overhead eating the gains; and the net margin is the final score. Watching all three together tells you where profit leaks — pricing, operations, or the tax line — and what to fix first.