Net profit margin is the percentage of revenue a store keeps as profit once all expenses are accounted for, like cost of goods sold (COGS), operating expenses, interest, and taxes.
In a 2025 Shopify survey, 42% of store owners cited ensuring profitability as their top business goal.* Net profit margin helps those business owners set a concrete numerical goal that shows profitability by seeing the share of every sales they keep after covering costs.
This guide covers how to calculate net profit margin, what counts as a good margin, and how to improve your net profit margin.
What is net profit margin?
Net profit margin is the ratio of net income to revenue expressed as a percentage. It shows how much of each sales dollar remains as profit once every business expense is subtracted.
There are four main categories of expenses that get subtracted from revenue to calculate net income:
- Cost of goods sold (COGS). The direct cost of producing or purchasing what a store sells, from raw materials and production labor to wholesale costs.
- Operating expenses. Commonly refers to the indirect costs of running a business. Also called overhead costs, these cover marketing, rent, insurance, payroll, and other costs of running the business day to day. Depreciation of tangible assets and amortization of non-tangible assets may also be included.
- Non-operating expenses. These are expenses that aren’t necessarily related to operating the business. This might include expenses like interest payments on debt, lost asset write-offs, business restructuring costs, or disaster-related costs.
- Tax. Income tax after calculating your earnings after expenses.
All four categories may show up on a store’s profit and loss statement. Net profit margin is one of the three types of profit margin, and it helps a business see their overall financial health by gauging actual profit after every dollar that leaves the business.
Here’s an example. If your business generates $100,000 in revenue over the course of a year, and you spend $65,000 of that on overhead costs and inventory, your profit is $35,000. That means for every dollar you took in for the year, you kept 35¢ as profit, a 35% net profit margin.
Why is net profit margin important?
Net profit margin does more than tell you last quarter or year’s performance. There are three main benefits of measuring your net profit margin:
- Cost control. A shrinking margin, even if your revenue is rising, shows costs are rising faster than sales. You may want to take a closer look at your COGS or overhead to see if you can bring costs down.
- Pricing strategy. Comparing net profit margin against a target market can help your store set or adjust pricing to support your profit goals.
- Investor and lender appeal. Investors and lenders weigh net profit margin alongside return on investment to judge how efficiently a business turns a profit.
In a 2025 Shopify survey, 79% of store owners said they use profits to self-fund growth. That can only be achieved with a positive net profit margin.
Your store won’t always have profitable months, but keeping a close eye on metrics like your net profit margin can help you understand what’s taking the biggest chunk out of your profits.
How to calculate net profit margin
The net profit margin formula divides net profit by net sales, then multiplies by 100 to turn the figure into a percentage:
Net profit margin = Net profit ÷ Net sales ⨉ 100
Net profit, also called net income, is calculated using the formula below:
Net profit = Net sales − COGS − operating expenses − non-operating expenses − tax
Net sales is what’s left from gross revenue after returns, discounts, and other allowances.
To calculate net profit margin for a given period:
- Pull net sales for the period from Shopify’s finance reports or your store’s income statement.
- Subtract COGS, operating expenses, non-operating expenses, and taxes to find net profit.
- Divide net profit by net sales.
- Multiply the result by 100 to turn it into a percentage.
Here’s where to find each variable in the formula:
| Variable | What it is | Where to find it |
|---|---|---|
| Net sales | Gross revenue minus returns, discounts, and allowances | Shopify’s Finance reports or your store’s income statement |
| COGS | Direct cost of producing goods or services sold | The income statement or product cost fields in Shopify admin |
| Operating expenses | Rent, payroll, insurance, and other overhead | The income statement or accounting software |
| Non-operating expenses | Interest payments on any debt, lost asset write-offs, business restructuring costs, or disaster-related costs | Loan statements or the income statement |
| Tax | Income tax paid | The income statement or tax filings |
Net profit margin example
Here’s an example of how the net profit margin formula would play out. Say a specialty beauty supply store recorded the following data for its latest quarter:
| Line item | Amount |
|---|---|
| Net sales | $75,000 |
| COGS | $20,000 |
| Rent | $20,000 |
| Insurance | $7,500 |
| Non-operating expenses | $2,500 |
| Income tax | $5,500 |
| Net profit | $19,500 |
Applying the formula, $19,500 ÷ $75,000 x 100 gets you a net profit margin of 26%.
What is a good net profit margin?
There’s no single good net profit margin. Good margins vary widely depending on your industry, business model, or even how your company is financed, so it’s important to compare against businesses in a similar category rather than an overall benchmark.
The table below shows net profit margins across a range of industries as of January 2026, based on data from NYU Stern’s margins by sector dataset:
| Industry | Average net profit margin |
|---|---|
| Retail (grocery and food) | 1.32% |
| Apparel | 3.85% |
| Retail (general) | 5.61% |
| Healthcare products | 9.61% |
| Software (system and application) | 25.49% |
| All industries (total market) | 9.74% |
Company size and business model also matter when looking at net profit margin. Apple posted a net profit margin of about 27.2% for its fiscal 2026 third quarter, keeping over 27¢ of every revenue dollar as profit, largely due to the strength of its high-margin services business. Walmart’s net profit margin for its fiscal 2026 second quarter was around 3.4%, which is more typical for a high-volume, low-margin retailer.
Margins are also under pressure across small businesses in general. In the Federal Reserve’s 2025 Small Business Credit Survey, increased costs of goods, services, and/or wages was the most common financial challenge in the previous 12 months for small employers. Around 77% reported those costs and/or increased tariff-related cost increases—tariff-related cost challenges were most prevalent in retail (69%).
How to improve your net profit margin
Improving your net profit margin means finding ways to increase revenue and decrease costs. Deloitte’s 2026 Retail Industry Global Outlook survey asked retail executives about how they plan to do that:
- 73% said they intend to gradually adjust retail prices upward
- 72% plan to shift their product mix toward higher-margin or value-added items
- 67% foresee an increase in the threshold for free shipping
- 71% report gaining a competitive edge through stronger cost control
Increase revenue
Try these tactics to increase revenue in your retail business:
- Raise prices on select products. A price increase immediately leads to a higher margin since it doesn’t add cost. Test increases on a single collection of products first to gauge how demand shifts.
- Shift toward higher-margin products. Stock some higher-margin products with lower acquisition or production costs to raise your overall margin without raising costs across the board.
- Raise the free shipping threshold. A higher order value required for free shipping increases overall average order value while also cutting the share of orders that absorb shipping costs.
Decrease costs
Another way to improve net profit margin is to lower your costs. To do this:
- Renegotiate with suppliers. Increasing your order volume often gives your store more negotiating power to secure better unit costs.
- Cut low-value overhead. Pay attention to subscriptions you don’t need anymore, staff that aren’t contributing to sales, or cheaper storefronts in your area as those can all help trim costs.
Coop Sleep Goods Cofounder Kevin Chon says his brand ran lean early on to protect quality rather than cut it.
“We had to make the sacrifice of profit to make the product better. The fact we were running such a lean team allowed us to do that,” Kevin says in a Shopify Masters interview. “As we scaled up and volume increased, we had more negotiating power with the suppliers.”
Measure and monitor your margin
Any improvements you make will only stick if you’re tracking margin regularly. In a 2025 Shopify survey, less than half of store owners reported tracking profit margin, traffic, average order value, or conversion rate, though 69% said they review their finances at least weekly.*
“The mantra out there is, ‘We’re just reinvesting our profits,’ and that’s an excuse to not even track your profits,” Shock Surplus Founder Sean Reyes says in a Shopify Masters interview. “How profitable are you? Are you tracking that actual investment into your company to see if it’s producing more business or more profit, or is it just like a blank check for any profit to just get rolled back into your cost of goods and there’s no tracking of it? Going through your P&L with a fine-toothed comb to really, truly understand your business, a lot of founders do not want to do that.”
Shopify’s profit reports show gross profit by product and margin by order, using the cost per item recorded on each product’s detail page in the Shopify admin. Recording accurate product costs makes sure your reports are usable.
Limitations of net profit margin
Net profit margin does have its limitations, especially when comparing across stores or time periods. Here are some limitations to expect with this metric:
- Financing choices. Two stores with identical operating performance can still have different net profit margins, because one carries more debt. Interest payments lower net profit margin without reflecting overall performance.
- Tax differences. Business structure and location can impact taxes due, but net profit margin puts all of that into one number. Comparing margins across stores in different states or countries doesn’t necessarily reflect actual performance differences when tax rates can be so different.
- Seasonality. A store with a high-performing holiday season can show a strong net profit margin for one quarter and a thinner (or even negative) one the rest of the year. Looking at margin across a full year can give you a better picture than just one quarter.
- One-off items. A one-time event, like the sale of a large asset, can temporarily inflate profit with no real change to how your business runs.
Use net profit margin as part of the larger financial picture when assessing your business’s health, pairing it with other ratios. Look at metrics like gross profit margin (which looks at profits after COGS) and operating profit margin (the ratio of operating income to net sales) to get a more complete picture of your business’s financial health. A break-even analysis can also help to show the sales volume needed to cover your costs.
Comparing profit metrics
There are three main profit metrics that help paint the full picture of your business. This table explains what each one means for your performance.
| Metric | What it subtracts from revenue | What it shows |
|---|---|---|
| Gross profit margin | COGS only | Profitability of the product itself, before overhead |
| Operating profit margin | COGS and operating expenses | Profitability of core operations, before interest and taxes |
| Net profit margin | COGS, operating expenses, non-operating expenses, and tax | Profitability after every business expense |
*Based on a 2025 survey of 500 Shopify merchants conducted in English across Australia, Canada, the United Kingdom, Ireland, New Zealand, and the United States. Respondents were established merchants with two or more years on the platform. Results reflect the experiences of this specific sample and may not be representative of all merchants.
Net profit margin FAQ
Is a 7% net profit margin good?
A 7% net profit margin sits close to the 9.74% net margin across sectors tracked by NYU as of January 2026, so it’s a reasonable figure for many industries. However, if you look at your specific industry, it might tell a different story. The apparel net profit margin is 3.85%, so a 7% profit margin would be great. But in a software (system and application) company, where the net profit margin sits at 25.49%, a 7% profit margin would be on the low end.
What does a 20% net profit margin mean?
A 20% net profit margin means a business keeps 20¢ of every revenue dollar as profit after covering every business expense, including COGS, operating expenses, non-operating expenses, and tax. According to NYU’s data. That level is common in software and pharmaceuticals, industries with low COGS relative to revenue, but less common in retail, where thin per-unit margins are the norm.
Is net profit the same as net income?
Yes, net profit and net income are the same figure: net sales minus expenses. Net profit margin turns that dollar figure into a percentage of revenue, which makes it easier to compare profitability across businesses of different sizes.
What does net profit margin tell you?
Net profit margin shows how much of every sales dollar a store keeps as profit once all expenses come out. A rising margin points to improving cost control or pricing, while a falling margin, even if revenue is growing, means costs are increasing faster than sales.
What’s the difference between net profit margin and gross profit margin?
Net profit margin subtracts every expense from revenue, whether that’s COGS, operating or non-operating expenses, or tax. Gross profit margin only subtracts COGS.
