Finance
Gross profit margin
Helps managers answer: How much profit are we generating for each dollar in sales?
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Gross profit margin vs Net profit margin
These models cover closely related ground. Compare their purpose, scope, practical guidance, and supporting resources to choose the better fit.
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Finance
Net profit margin
Helps managers answer: How much profit are we generating for each dollar in sales?
Read articleChoice logic
Use this when.
Determine how much gross profit the organisation retains from each dollar of sales.
Answer: “How much profit are we generating for each dollar in sales?”
Extracted signals
Strengths, limits, and pitfalls.
Gross profit margin
- Go below the corporate average. Comparing margins by business unit, department, product, channel or customer can reveal the economic drivers hidden by an aggregate result.
Watch for
- Do not confuse markup with margin. Gross profit margin uses selling price as its denominator; markup conventionally uses the seller’s cost.
Net profit margin
- Decompose the margin change and compare it with cash conversion, return on capital and reinvestment. A ratio becomes useful when its drivers are actionable.
Watch for
- Do not treat an old cross industry league table as a benchmark. Accounting choices, one offs, business models and economic cycles can make apparently similar margins incomparable.
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