Average Profit Margin

Discover how Average Profit Margin helps businesses measure the percentage of revenue retained as profit after costs. Learn how to calculate, analyze, and optimize this KPI to improve financial performance and business sustainability.

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KPI Details for Average Profit Margin

Category

Marketing, Ecommerce
Type

Lagging Indicator
Calculation

Average Profit Margin (%)=( Revenue−Cost of Goods Sold (COGS) / Revenue ​) × 100
Measure

Tracks the percentage of each dollar of revenue that becomes profit after subtracting costs, providing insight into pricing, cost control, and efficiency.
Data Sources:

QuickBooks, Xero, NetSuite, Stripe, Shopify, WooCommerce, Excel/Google Sheets, ProfitWell.
Frequency

Tracked monthly or quarterly to assess profitability trends and make strategic financial decisions.

Example target

Increase average profit margin by 5% in Q3 by reducing COGS through supplier negotiations and optimizing pricing strategies.

Example Reports Use Case

A CFO or Finance Manager tracks Average Profit Margin to evaluate business profitability. If margins shrink, they may review cost structures, revise pricing, or eliminate low-margin products.

KPI Example

Best Practices for Average Profit Margin

  • Negotiate Better Supplier Rates

    Reducing costs on raw materials or products directly boosts margins.

  • Review & Adjust Pricing Strategy

    Ensure pricing reflects value, demand, and market position while covering all costs.

  • Eliminate Low-Margin Products

    Focus on products or services that deliver the highest profitability.

  • Control Operational Costs

    Streamline processes and reduce overhead expenses without sacrificing quality.

What is Average Profit Margin

Average Profit Margin is a financial key performance indicator (KPI) that measures the percentage of revenue a business retains as profit after accounting for all expenses and production costs. It reflects a company’s efficiency in managing costs relative to sales. A higher profit margin indicates that a business is effectively controlling expenses and maximizing earnings from its revenue. Related to this concept, Gross Profit Margin specifically represents the percentage of revenue remaining after subtracting the cost of goods sold (COGS), which includes direct production expenses like labor, raw materials, and packaging, but before deducting operating costs such as marketing and overhead.

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