Profit margin shows what percentage of your revenue remains as profit after costs. You divide profit by revenue and multiply by 100. Gross margin subtracts only the direct cost of the goods sold. Net margin subtracts everything, including rent, salaries, interest, and tax. Always say which margin you mean.
An example. Your shop makes €500,000 in revenue. The goods cost €300,000, so gross profit is €200,000 and gross margin is 40 percent. Rent, salaries, marketing, and software take another €160,000. Net profit is €40,000, so net margin is 8 percent.
The two numbers tell different stories. A 40 percent gross margin says your pricing works. An 8 percent net margin says your overhead eats most of it. A competitor with the same gross margin and a leaner operation earns far more from the same sales.
Margins differ enormously by industry, so compare only against businesses like yours. Grocery retail runs on low single-digit net margins by design. Software often reaches a much higher gross margin, because copying a file costs almost nothing. The same 15 percent means something different in each case.
Founders make two mistakes. First, they quote one margin and mean the other, which makes an investor conversation confusing. Second, they chase the percentage instead of the euros. Cutting your marketing spend raises the percentage but can shrink revenue and total profit at the same time. €40,000 of profit on €500,000 of revenue beats €30,000 of profit on €150,000 of revenue, even though the second margin looks twice as good.
Track margin over time and per product. A falling margin usually appears before a falling bank balance.
