Profit Margins: Strategies to Increase Your Profit Margins

profit margins

Every business exists to make money. Without doing so, the business will eventually fold up.

For example, in respect to tech companies folding up as soon as they are established, Farah K, a product marketing manager , writes why, having been in that industry for almost a decade. “Locally, internationally, small tech, big tech, bootstrapped startups, and VC-funded startups” are struggling to break even because they have refused to pay attention to profit margins, among other things.

“A guy I know is running a startup of 10 people with costs outrunning revenue by quite literally 100%. Now he’s chasing for partners and investors. A popular bus service company laid off dozens of people just 6 months shy of being recognized for getting the ‘highest’ rounds of VC funding.”

Farah’s finding isn’t limited to the tech industry alone. Many businesses and startups in other industries are also facing this challenge.

This makes it pertinent that every business owner pays adequate attention to their profit margin.

Key Takeaways

  • Profit margin is the indicator of a business’ health and profitability.
  • There are no fixed rules as to what constitutes a bad profit margin because profit margins vary from industry to industry.
  • Strategies to increase profit margins include, reducing direct and operating costs, increasing sales or price, and increasing customer retention.

What is a Profit Margin?

Profit margin shows the amount of money your business retains for each dollar of sale. In other words, it shows the extent of your business’s profitability. The profit margin is expressed as a percentage. The greater the percentage, the higher the profits the business is generating. Profit margin is also an indicator of a business financial or fisical health.

What is the Gross Profit Margin?

A gross profit margin is the amount expressed as the percentage of revenue that is left after deducting direct expenses. Direct expenses are costs associated with producing the product or service. E.g. wages and raw materials.

How to Calculate Profit Margins

Profit margin is measured at three levels: gross profit margin, operating profit margin and net profit margin.

For example, if a business generates $5,000 in sales and its operating and direct costs are $1,500 and $1,000, respectively, the first thing to find out is the gross profit margin.

Gross Profit Margin= GP/Revenue*100 

To find gross profit, deduct direct costs from sales.

$5,000-$1,000 which gives $4,000

GP/Revenue *100 gives the profit margin in percentage.

$4,000/5,000*100 = 80%

Operating Profit Margin

Operating Profit Margin = Operating Profit/Revenue multiplied by 100.

To get the operating profit, deduct operating expenses from gross profit.


OPM= $2,500/5000*100


Net Profit Margin 

Net Profit Margin = Net Income/Revenue multiplied by 100

To arrive at the net income, taxes and interest, operating and direct costs are deducted from revenue.

Dock Treece, a businessnewsdaily contributor, writes that “if your gross profit margin and operating profit margin are healthy, but your net profit margin shows issues with the bottom line, you have both nonessential operating costs and overhead you can cut. If the problem shows up at the level of the operating profit margin, your operating costs are more than you can cover at the price you’re charging for your goods or services. “

Good Profit Margin and Bad Profit Margins

According to, “a good margin will vary considerably by industry, but as a general rule of thumb, a 10% net profit margin is considered average, a 20% margin is considered high (or “good”), and a 5% margin is low. Again, these guidelines vary widely by industry and company size and can be impacted by a variety of other factors.”

Jim Larvato, founder of 4M performance, says it. “Depends on the business and industry you are in. If I’m in a grocery supermarket a 50% margin is unheard of – they usually work on margins below 5%.

“If I’m in the cosmetics industry 50% is low. They operate on 100–200% margins. Jewellery stores normally work on 500–600% margins.” Jewellery stores have high profit margins because their products are often sold at high prices.”

Strategies to Increase Your Profit Margins

A rising profit margin is an indication that your business is thriving. It also shows that you have  learnt how to  increase the amount of money coming into your business versus what is going out. Research shows that the following are some ways you can improve your profit margin.

Expenses should be monitored and tracked

Knowing the different forms of expenses, your business makes, and tracking them is critical for eliminating unnecessary costs. Direct costs and operating costs are two costs that impact the profit margin. To reduce direct costs, you can look for cheaper suppliers for your raw materials. However, care should be taken not to downgrade the quality. For example, the individual mentioned by Farrah.K whose costs were far in excess of his revenue could have cut costs by hiring fewer people, outsourcing some business functions, or hiring contract workers rather than full-time employees.

By monitoring and tracking expenses, you will be able to prioritise what you should spend on and what you can do without.

Increasing prices or sales

Increasing the price of your product will boost your revenue. However, there is a caveat: you may lose customers. If you can raise your price without losing too many customers, you can quickly increase your profit margin. If raising prices is not an option for your business, another good option to try is to increase sales. Upselling, cross-selling, collaboration and partnerships are some of the strategies you can use to increase sales.

When you start doing things to boost sales, your costs could go up. As a result, adopt cost-effective strategies while growing sales.

Increase Customer Retention

Studies show that increasing customer retention is far more cost-effective at increasing sales than acquiring new customers. It will cost you seven times more to acquire a new customer than it will to retain an existing one. In fact, increasing the customer retention rate by 5% can increase sales by 25-95%.

In summary, whether you are a new business or an established one, you need to pay attention to your profit margin to remain in business. It is an indicator of your business’s financial health and profitability.

Recommended Resources:

Uncover your strengths and weaknesses with our complimentary assessment. Boost your effectiveness at work and with your team.

Free Resource Library: Access our extensive collection of valuable resources for instant support in your personal and professional growth.

Explore Our Course Library:

Enhance your leadership skills with our diverse selection of courses. Take your abilities to the next level and become a more effective leader and team player.


Our Clients Love the Professional Leadership Institute

Your team will, too! Check out some reviews from our students.
The PLI program was invaluable to our network.
The range of topics delivered, the open dialogue, experience, and examples that PLI brought to each session were outstanding and provided a path for our Franchisees and Managers to look at leadership, coaching, and connecting with their teams in a new light. Many have implemented these strategies in their bakeries and have seen immediate results.
Michelle C.
COBS Bread
Highly recommend to help your team move forward
We have locations around BC and Alberta, so getting people on the same page can be very difficult... Until now. Our entire management team and location managers take the same great courses and then meet monthly online with our coach to apply it to our situation. People are engaged, the courses are excellent, we love our coach, and we are all learning together!
Jason Fawcett
President, Kelson Group
The result has been a transformation of our culture. 
We decided to implement PLI's strategies across the country in over 150 locations and over 3500 employees.  The result has been a transformation of our culture.  People's lives have been positively impacted - professionally and personally.  Morale is high and sales and profits are up as a result.
Daryl Verbeek
Daryl Verbeek
We’ve learned how to fix ongoing personnel issues once and for all
The roadmap laid out set our business up to quintuple in sales.  We've learned how to fix ongoing personnel issues once and for all, attract top talent, and spend our time focused on results, not internal staffing problems.  I highly recommend PLI to you - it's worked for us!
John DeJong
Satisfied Client
I had no idea that running a business could be this fun!
In less than 18 months of working with Trevor, he has transformed my business from being average to exceptional, where mediocrity is not acceptable, where being great is standard.  Working with PLI has allowed me to realize my dream of not simply owning a job, but owning a business.
Justin Bontkes
Principal, Caliber Projects
Our culture has taken major steps forward this year
Our culture has taken major steps forward this year with Trevor’s help.  He is funny, relatable, and his tools are very very practical and have helped us focus and upgrade our teams throughout our retail network. Trevor recently spoke to an employee group, and one person remarked, “I could listen to Trevor all day.”   We would highly recommend Trevor.
Stan Pridham
Founder, KMS Tools
The results have been remarkable
At first, we resisted, “This just won’t work with a law firm.” But we persisted and the results have been remarkable: our client base and profits have steadily improved, and staff engagement and morale is the healthiest its ever been.
Doug Lester
Partner, RDM Lawyers
Helped our fast-growing business become what it is today
I've experienced PLI's approach first hand and it's been crucial to sustaining our growth.  I can't imagine a business that wouldn't benefit greatly from his help.
Brian Antenbring
Founder, TEEMA
Provided practical ways to make positive changes
Trevor was incredibly well-received by the entire organization. He was able to articulate people issues that many of our franchisees were experiencing and provided them with practical ways to make positive changes. We have implemented the Star Chart tool across the organization and see it as vital to building happy, effective teams.
Aaron Gillespie
President, COBS Bread
Scroll to Top

Start Learning Today

For Individuals

Unlock your potential and accelerate your career with sought-after management and leadership skills.


Transform Your Organization

For Teams

Book a consultation to discuss your challenges and discover how we can help you build a winning team.


Sign Up For Weekly Tips!

Get Weekly Coaching Tips Straight To Your Inbox Every Monday.