||This article should be divided into sections by topic, to make it more accessible. (February 2014)|
- where Net Profit = Revenue - Cost
Profit margin is calculated with selling price (or revenue) taken as base times 100. Profit margin is the percentage of selling price that turned into profit, where as "Profit Percentage" or "Markup" is the percentage of cost price that one gets as profit on top of cost price. So while selling something one should know what percentage of profit will he get on a particular investment so companies calculate profit percentage to check what is ratio of profit on the basis of cost. The profit margin is mostly used for internal comparison.
On the other hand, profit percentage is calculated with cost price taken as base
Suppose you buy something for $100 and sell it off for $150.
- cost price = $100
- selling price (revenue) = $150
- profit = $150 - $100 = $50
- profit percentage = $50/$100 = 50% (profit as percentage of cost price)
- profit margin = $50/$150 = 33.33% (profit as percentage of selling price or revenue)
The profit margin is mostly used for internal comparison. It is difficult to accurately compare the net profit ratio for different entities. Individual businesses' operating and financing arrangements vary so much that different entities are bound to have different levels of expenditure, so that comparison of one with another can have little meaning. A low profit margin indicates a low margin of safety: higher risk that a decline in sales will erase profits and result in a net loss, or a negative margin.
Profit margin is an indicator of a company's pricing strategies and how well it controls costs. Differences in competitive strategy and product mix cause the profit margin to vary among different companies.