# What is Net Profit Margin?

What is Net Profit Margin? Net profit divided by total revenue, as a percentage. Net Profit Margin = net profit / revenue × 100.

## How it works in practice

Net profit margin is the real 'bottom line.' A store with $280,000 revenue and a 5% net margin = $14,000 annual profit. A store with $140,000 revenue and a 15% net margin = $21,000 profit. Bigger doesn't mean more profitable. Margin matters more than size.

## Related metrics

- Gross Margin — net margin is always lower than gross
- EBITDA — a version of net margin excluding taxes and depreciation
- Contribution Margin — the step between gross and net
- P&L — net margin is derived from the P&L

## Common misconception

'A good gross margin means a good net margin.' No. A 60% gross margin with 40% marketing spend, 12% salaries, and 8% rent = 0% net margin. A loss. Many eCommerce stores miss this because they look at gross and ignore the rest of the expenses.

## How to fix it

Negative net margin? (1) Build a simple P&L: revenue - COGS - marketing - salaries - rent - platform fees - other = net profit, (2) Identify the biggest category, (3) Check whether marketing ROI justifies the spend, (4) Fixed costs — can they be trimmed in year one?

## Real-world example

Apparel store: revenue $220K, gross margin 48% = $106K. Marketing $55K, salaries $33K, platform+fees $12K, other $8K = expenses $108K. Net margin: -$2K. Gross looked great — net showed a loss. Fix: cut marketing to $44K + streamline salaries.

## Where to start

Calculate net profit margin monthly. Don't run a business by bank balance alone — build a simple P&L. Tools: QuickBooks, Xero, or Excel. If net margin is under 5%, there's work to do.

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Category: Finance · From the [Jimmy OS KPI Glossary](https://jimmy-os.com/glossary/kpi.md) · Source page: https://jimmy-os.com/glossary/kpi/net-profit-margin