Gross Profit Margin vs Net Profit Margin: The Difference, Why It Matters, and What Most Businesses Get Wrong

Kash Rocheleau
Jan 19
3 min read

January 19, 2026

Revenue is exciting.Sales feel good.But profit — profit is what keeps the lights on.

And in the profit conversation, two metrics matter more than almost anything else:

Gross Profit MarginNet Profit Margin

They are related, but not interchangeable. One tells you if your product or service is priced correctly. The other tells you if your entire business model is sustainable.

If you’re only watching one, you’re running with one eye closed.

Let’s break them down clearly.

What Is Gross Profit Margin?

Gross Profit Margin measures how profitable your product or service is before overhead.

It answers one question:Are we pricing and producing efficiently?

Formula:(Gross Profit ÷ Revenue) × 100

Gross profit = revenue minus cost of goods sold (COGS).That means materials, production labor, packaging — everything needed to deliver what you sell.

If you sell a product for $100 and it costs $40 to produce, your gross profit is $60.Your gross profit margin is 60%.

A strong gross margin means:

Your pricing is healthy
You have room to scale
You can invest in growth without breaking the business

A weak gross margin is a warning sign — before overhead, before payroll, before rent, before anything else.

If your margin is broken here, it’s broken everywhere.

What Is Net Profit Margin?

Net Profit Margin is what you actually keep after every expense is paid.

This is the bottom-line number investors, banks, and CFOs care about.

Formula:(Net Profit ÷ Revenue) × 100

Net profit accounts for everything:

Overhead
Payroll
Software and tools
Rent
Taxes
Operating expenses
Interest or debt servicing

If your business brings in $100,000 and you end the year with $15,000 left, your net profit margin is 15%.

This number tells you:

If your business model is viable
Whether you're scaling responsibly
How much breathing room you have during slow periods
How sustainable growth is long-term

Gross margin shows potential.Net margin shows reality.

So Why Do Both Matter?

Because they answer different questions — and both are mission-critical.

Metric	Answers	Focus
Gross Profit Margin	Is what we sell priced well? Are we producing efficiently?	Product/Service Economics
Net Profit Margin	Do we run profitably after all expenses?	Business Sustainability

High gross margin + low net margin means you’re pricing correctly but overhead is eating the business.

High revenue + low gross margin means you’re selling hard and winning big — but losing money doing it.

Strong businesses track both relentlessly.

What Most Business Owners Miss

Many only watch revenue. Some only watch the bank balance.Very few are actively monitoring profit margins.

Here’s the key:

Revenue growth without margin discipline is just a faster way to go broke.

Tracking both gross and net margins allows you to confidently answer:

Can we afford to hire?
Should we increase prices?
Where are we losing money?
Can we scale without stress?
Are we running lean or bleeding cash quietly?

Most bookkeeping systems simply record what happened.Profit margin analysis shows what it means — and what you should do next.

One gives you data.The other gives you decision-making power.

If numbers feel noisy, confusing, or flat-out overwhelming — you’re not alone.

Margins are where clarity begins.

Outgrow Accounting & Finance helps businesses calculate, monitor, and improve profitability — not just record history. Because numbers shouldn’t sit in reports; they should drive decisions.