Profit margin calculator

Profitability is one of the key metrics that defines the success of a company. As your business grows, a firm grasp of your profit margins—and a reliable profit margin calculator—can give you the valuable sales data you need to make informed financial decisions.

Our guide breaks down profit margin types, formulas, and six practical ways to improve yours. Use our free gross profit margin calculator above to help you quickly crunch your numbers.

More in this guide:

• How to calculate profit margin
• Understanding profit margin terms
• 6 ways to increase your profit margin
• Frequently asked questions
• Customer story
• Boost your profit margin with Zendesk

How to calculate profit margin

You can calculate three different types of profit margins: gross, operating, and net profit. 

Gross profit margin calculation

Gross profit margin is the profit percentage after deducting the cost of goods sold (COGS) from net sales. Our calculator above determines this type of profit margin.

Example:

Let’s say your net sales are $10,000 and your COGS is $6,000.

$10,000 – $6,000 = $4,000

$4,000 ÷ $10,000 = 0.4

0.4 × 100 = 40

Your gross profit margin is 40 percent.

Operating profit margin calculation

Operating profit margin shows how profitable your core operations are by comparing operating income to revenue. Calculate it by subtracting operating expenses from gross income, then divide by revenue.

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Example:

Say your operating income is $3,000 and your net sales are $10,000.

$3,000 ÷ $10,000 = 0.3

0.3 × 100 = 30

Your operating profit margin is 30 percent.

Net profit margin calculation

The net profit margin formula measures how much net income you generate from your total revenue. To calculate it, subtract COGS, operating expenses, interest, and taxes from revenue. Then use that number as your net profit in the formula.

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Example:

Suppose your total revenue is $10,000, and after subtracting all expenses (COGS, operating costs, interest, and taxes), your net income is $2,000.

$2,000 ÷ $10,000 = 0.2

0.2 × 100 = 20

Your net profit margin is 20 percent.

Understanding profit margin terms

Profit margin is the percentage of income remaining after costs are deducted from sales revenue.

Businesses with high profit margins are better at converting their revenue into profit. But to fully understand profit margin, you need to be familiar with a few key financial terms, like:

• Cost: The amount of money spent to create your products or services, often called Cost of Goods Sold (COGS).
• Margin: The difference between the selling price of your products or services and production costs. This differs from markup, which is the percentage added to the cost to set the selling price.
• Revenue: The total amount of income your business generates. It’s also important to differentiate between net sales vs. gross sales, as net sales subtract returns and discounts to give a more accurate picture.
• Profit: The difference between the amount earned and spent to produce your goods.

These terms all intertwine to help you get a complete picture of your financial stability.

6 ways to increase your profit margin

Follow our tips and best practices below to increase your profit margin and boost your bottom line.

1. Reduce operating costs

A great way to quickly increase profit margin is to reduce operating costs and expenses. To do this effectively, conduct an audit to identify money-saving opportunities like:

• Optimizing labor budgets or staffing costs

• Spotting opportunities to incorporate AI or use automation

• Eliminating expensive or unused office space

• Negotiating vendor discounts

However, before slashing expenses, you need to create an effective sales plan to make sure your budget cuts don’t hurt your business in the long run.

2. Embrace AI to streamline operations

Artificial Intelligence (AI) helps teams streamline support, reduce costs, and boost customer experiences, all of which support stronger profit margins.

Common use cases include:

• Task automation: Free up teams by handling repetitive or time-consuming tasks.
• AI agents: Assist with common customer requests and escalate more complex issues to human agents.
• Quality assurance: Use AI to surface inefficiencies, outliers, and churn risks.
• Personalized support: Detect intent and deliver tailored responses at scale.

AI also helps uncover hidden inefficiencies, enabling smarter resource use that protects profitability.

3. Build customer loyalty

Retaining customers and building customer loyalty are reliable ways to increase profit margins. You can create a dedicated customer base by providing excellent service, personalizing customer interactions, and offering perks like loyalty programs.

To see this in action, look no further than Grove. The online cleaning and wellness brand used Zendesk AI to build loyalty and help support agents personalize every interaction, leading to a 95 percent customer satisfaction (CSAT) score.

4. Increase average order value (AOV)

Another effective way to increase profit margin is to increase your average order value (AOV). Simply put, you want your customer to spend more per transaction.

Here are some ways to increase your AOV:

• Incentivize order minimums with discounts or free shipping.

• Offer product bundles or packages.

• Add recommendations or “customers also bought” prompts to online carts.

• Empower AI agents to give customers personalized product recommendations and suggest upsell and cross-sell opportunities.

• Run targeted sales promotions to encourage larger purchases and attract new customers.

You can also increase AOV by finding higher-quality customers. Tools like sales CRMs can optimize your sales funnel and help you connect with consumers willing to pay more.

5. Prioritize high-margin products

To increase revenue and profit margins, identify which products or services sell the best and have the most potential to deliver the most sales volume and profit for your business. Prioritize these high-margin products to maximize your revenue.

For services, consider your high-margin versus low-margin customers and focus more on the former. Dedicate your resources to these high-value clients to increase profitability.

6. Adjust your pricing

The most obvious solution may be the most effective. Some small businesses avoid raising prices, fearing that customers will jump ship. However, if you provide a quality product with great customer service, a bump in your pricing will rarely deter customers from making a purchase.

Another option is to work backward and start with your break-even point. Once you know how much you need to make on each product to stay afloat, you can adjust your pricing to achieve your desired profit margin.

Frequently asked questions

Customer story

Grove Collaborative

Grove boosts operational efficiency with Zendesk AI

“The most important reason to start AI with Zendesk is I was able to implement AI immediately without any developer support. The fact that we can just switch it on is something we never thought possible.”

Aashley Malsbury

Community Happiness Systems Manager

Read customer story

Boost your profit margin with Zendesk

A healthy profit margin can lead to a healthy business, but only if you take the right steps. You can’t just rest when you hit your desired margin. You must also look forward to consistently building customer loyalty, managing expenses, and investing in new technologies. With Zendesk, you can achieve all of that and more with our solutions like AI-powered QA and Zendesk AI agents.

Discover how Zendesk customer service software can help you boost your profits and connect with your customers.