What’s a good profit margin for a small business?
2 min read

What’s a good profit margin for a small business?

The short answer is, it depends.

Whether you have a good profit margin or not is determined by your industry, market and business model. But I’ll dive into that to give you a thorough answer.

Before I do, we need to establish what type of profit margins we’re talking about here. Because there are both gross and net profit margins to consider. I’ll focus on net profit margins because they are earnings a business owner has after all expenses and overheads are paid. They are the closest measure of your true earning power.

(If you need an explanation of these financial metrics then you can check out my guides on gross profit margin and net profit margin.)

Now, there are three ways to look at it, but the third is the most important.

First, unless there are any special circumstances at play, you’d like your profit margin to be positive. So anything above zero is a good start, but not yet a “good” profit margin.

Second, your profit margins would start to be considered “good” if they beat the general business average net profit margin of 7.7%. That means 7.7 cents of profit earned for every dollar of revenue you bring in. On the path to “good” this is the second hurdle, but not necessarily true for every business. This brings us onto the third and most important factor.

Third, the only real way to determine whether you have “good” profit margins is to compare your performance to your industry benchmark. For example, a good net profit margin for the average restaurant is 10%, but it’s 20% for a childcare center and 30% for a laundromat.

To determine whether you have a good profit margin you need to find the industry benchmark, and then make sure it is a good comparison to your business. In the restaurant industry for example, the target margin is different for a casual restaurant (10%) than it is for fine dining (20%). Do this by comparing yourself to well-run businesses in a similar market and with a similar business model to yours.

It’s important to note that in some high-volume, commodity businesses a 2% net profit margin might be considered really good. In which case the 7.7% hurdle is not applicable. You need to do your own research to find this number and find the right comparison.

So a good profit margin for a small business is one that is (a) positive, (b) above 7.7%, and/or (c) equals or betters the benchmark for your industry.

I hope this helped.