Profit margin is one of the most important metrics for the health of a business — it measures what percentage of revenue is left over after subtracting the cost of doing business, effectively showing how successful the business is. It’s an easy metric to keep track of with a profit and loss statement, or through your accounting software of choice.
Generally, when discussing profit margin, people are referring to net profit margin — as opposed to gross profit margin.
Gross profit margin vs. net profit margin
Gross profit margin is the money left over after subtracting the business’s cost of goods sold, also known as COGS. Net profit margin is what’s left over after you deduct COGS as well as taxes and other administrative fees and expenses.
Many business owners pay themselves a salary as part of their labor cost, and net profit is the additional money they can take home if the business is doing well enough to be in the black.
Profit margin formula for small businesses
To calculate profit margin, you first need to calculate your business’s net profit.
Revenue – COGS – other tax and admin expenses = Net profit
Then, you divide the net profit by the revenue, and multiply it by 100 to get the profit margin shown as a percentage of revenue.
(Net profit / Revenue) x 100 = % Profit margin
What’s a good profit margin for a small business?
In general, a successful small business can expect to make between a 7% and 10% profit margin, though of course it varies by business type and industry. Over time, by trying new revenue channels to grow sales and by keeping costs low, businesses can become even more efficient and more profitable.
Average industry profit margins to use as benchmarks
Wondering how your small business profit margin stacks up to the industry average? Here, we provide a high-level overview of average profit margins for common industries.
Restaurant profit margin
Full-service restaurants typically see a profit margin between 3% and 5%. Different types of restaurants have different average profit margins, generally ranging from 0-15%, with ghost kitchens and pizzerias at the top of the list with profits around 15%.
Been in business for a bit? Read more on improving restaurant profit margins.
Liquor store profit margin
Liquor store profit margins are 15-20% on average. It’s especially high thanks to the very high markup on alcoholic beverages, long-lasting inventory with limited worries about spoilage, and the regular sales that come in all year round.
"If you're considering signing up for alcohol delivery with DoorDash, do it. DoorDash brings you new customers from outside your regulars, and it's extra revenue for your business. It's allowed us to invest in a new refrigeration unit to help keep our delivery orders cold."
Learn more about liquor store profit margins and how alcohol delivery can help in this blog post: How Savemore Grew Alcohol and Convenience Revenue.
Pet store profit margin
Pet store profit margins vary widely, as the business model behind a pet store franchise of a major corporation will be very different from that of a local independent pet store. Whether or not they sell pets as well as pet supplies will also greatly impact the profit margin of a pet store. For reference, a Pet Supplies Plus franchise can expect to bring in about 7% profit margin.
Grocery store profit margin
Grocery stores have especially slim profit margins, ranging from 1-3%. Independent grocers will have a different profit margin than major big-box stores. Specialty grocers like Whole Foods that sell high-quality, organic goods and can charge a premium, will be at the top of the range.
Because grocery store margins are so low, it’s important to keep sales consistently high, as a slow period could lead to major problems. That’s why many grocery stores have partnered with platforms like DoorDash to offer delivery and pickup to reach more customers and provide a seamless online ordering experience.
After using and considering other food delivery services, DoorDash seemed to always have the most variety, full menu offerings, and functionality. These factors helped me determine that DoorDash could easily be my go-to food delivery service — and the DashPass was well worth every cent.
Convenience store profit margin
Individual convenience stores typically aim for 5% profit — but chains with multiple locations can generally reach 10% profitability. However, this figure can fluctuate depending on the overhead expenses of the business, especially in terms of rent, which can be vastly different depending on the location.
Flower shop profit margin
Flower shop profit margins come in around 20%. Because they buy flowers in bulk and are able to mark up the price significantly when they sell them individually — and even more so when they’re arranged and wrapped beautifully for special occasions and events — busy florist businesses can bring in high profits.
"We try to be where the customer wants us to be, in a very competitive market — and partnering with DoorDash to expand our delivery capabilities helps us do that."
Learn more about flower shop profitability in our blog How Atlanta’s The Flower Shop Grew Their Profit Margins 10%.
How to improve small business profit margins
Businesses can improve revenue by increasing profits, reducing costs, or a combination of both. Here are a few strategic ways to grow your profit margins.
1. Audit individual item performance
Run quarterly product audits. It may be too much work to audit the performance of every item every quarter, but even just focusing on one product category at a time can illuminate opportunities for paring back inventory that’s gathering dust and draining profit.
2. Run promotions
Create limited-time promotions to drum up urgency and encourage customers to increase their shopping habits at your store. Whether it’s an end-of-season sale, a buy one/get one half-off deal on certain items, or a new loyalty program that gives away a free item after five purchases, explore creative ways to get more people to engage with your store and ultimately drive sales. Then, be sure to share details about your promotions using free or low-cost methods like social media marketing, email newsletters, or your own website.
DoorDash partners get access to in-app marketing tools, including Promotions that entice new and repeat customers with a discount or offer that fits your business goals. In addition, business owners can try Sponsored Listings to boost your store's visibility with ads in the DoorDash app and website. These ads are profit margin-friendly, as you’ll only be charged for orders placed through your ad — not for clicks or impressions.
3. Build your brand
Brand-building is an important part of encouraging customers to become loyal to your store over all other options. Today, there’s immense competition in virtually every industry, so making your business stand out with a compelling brand and story is critical.
Use social media to showcase what makes your brand special and connect with local communities. Try a mix of planned and spontaneous content across different social media channels. And use behind-the-scenes content to keep your audience engaged and excited for new menu items and specials — the more you promote and sell higher-value items, the higher your profits in a given time period.
4. Offer a seamless online ordering experience
One of the best ways to increase sales and help boost profit margin is by offering many ways to engage with your business. Meet customers where they are by letting them order online. DoorDash Online Ordering enables businesses to set up an online ordering system to generate pickup and delivery orders, with no commission fees or monthly fees — you just pay payment card processing fees. Delivery orders will be fulfilled by Dashers and pickup orders will be collected in your store by customers.
"The biggest bonanza of Online Ordering is that it's commission-free. I mean, you can’t beat it."
Especially if your business is one that people wouldn’t associate with delivery, create in-store signage and social posts about how to order online for pickup or delivery.
5. Create item bundles
Create item bundles that still feel like a deal to your customers but drive up average check sizes, helping increase overall profit. For example, a liquor store can market a summer special Rum & Coke kit with a bottle of rum, a bottle of Coca Cola, and three fresh limes. Customers might have just bought the rum at the liquor store, expecting to stop at a convenience store for mixers, but seeing everything together, packaged conveniently and appealingly, they’ll opt for the full package.
6. Reduce operating costs
In addition to boosting sales, stores can grow their profit margin by reducing their overall operating costs. Here are a few strategies to try:
Audit your wholesalers and ensure you’re getting the best prices. Negotiate for better deals or look for alternatives that might be cheaper.
Train all employees in waste-reduction strategies and proper storage to reduce spoiled products.
Minimize employee turnover, as it costs far more to replace an employee than it does to keep one. Consider offering a retention bonus, investing in training programs, and recognizing top performers for their work. Learn more employee retention strategies.
7. Work on active and passive upselling
Train all staff to actively upsell customers as they’re checking out — and set up your store to encourage bonus purchases at the cash register to passively upsell.
For example, at a convenience store, cashiers can direct customers trying to buy a coffee to try the new limited edition matcha latte. They can also place bins full of small bags of bulk candy at the cash register for customers to grab and add to their purchase.
Stay on top of your business profit margins with our free profit & loss template
No matter what type of business you run, it’s always important to track your revenue and expenses using a profit & loss (P&L) report. Use this free P&L template to start keeping an eye on your margins, track financial performance, and find places to make operational improvements.
