What Is Operating Profit Margin? Formula and Examples

Operating profit margin is the percentage of revenue left after a business pays its cost of goods sold and operating expenses. It shows how efficiently a company turns sales into profit before interest and taxes.

In a 2025 Shopify survey,* 42% of store owners cited ensuring profitability as their top business goal. Tracking operating profit margin helps you evaluate pricing and expenses and identify changes that improve financial performance.

This guide explains how to calculate operating profit margin, evaluate your results, and improve your business’s profitability.

What is operating profit margin?

Operating profit margin, also called operating margin, measures how much profit a company earns from its core business operations per dollar of revenue, before interest and taxes. 

It’s expressed as a percentage. A 15% operating margin means the company earns 15¢ in operating profit from each dollar of net sales.

Operating margin is one way to measure profit margin. Calculate it by dividing operating profit by net sales and multiplying the result by 100. Operating profit is also called operating income or earnings before interest and taxes (EBIT). Net sales is gross sales minus returns, allowances, and discounts. 

A business then subtracts two main types of costs:

1. COGS. Cost of goods sold covers direct costs associated with producing or purchasing products. Examples include raw materials and production labor.
2. SG&A. Selling, general, and administrative operating expenses cover indirect costs such as rent, utilities, administrative payroll, and marketing.

Interest payments and income taxes are excluded because they are not part of daily business operations. A company’s operating margin tells businesses about its:

• Operational efficiency. How much revenue remains after paying operating costs.
• Management of daily operations. Whether pricing and expense decisions are protecting profit.
• Competitive position. How the company’s profitability compares with similar businesses.

Operating margins vary by industry, so comparisons are most useful between companies with similar business models. 

Take Amazon’s 2025 results, for example. Amazon Web Services (AWS) produced $45.6 billion in operating income on $128.7 billion in sales. 

Amazon’s North America segment produced $29.6 billion in operating income on $426.3 billion in sales. Based on those figures, the segments had operating margins of about 35% and 7%, respectively.

How to calculate operating profit margin

Calculate operating profit margin by subtracting operating costs from net sales, then dividing the result by net sales. The formula is:

Operating profit margin = (Net sales − COGS − operating expenses, including SG&A) / Net sales x 100

Find net sales, COGS, and SG&A on the business’s income statement. Use figures from the same reporting period.

Here is how the calculation works for an online patio furniture retailer:

1. Find net sales. The retailer generated$20 million in net sales (They found this figure––and their costs and gross profit in Shopify’s Finance Summary report).
2. Subtract COGS and SG&A. The retailer spent $12 million on production costs and $4 million on overhead costs. Their operating profit is $20 million − $12 million − $4 million = $4 million.
3. Divide operating profit by net sales. The retailer divided $4 million by $20 million to get 0.2.
4. Convert the result to a percentage. Next, they multiplied 0.2 by 100 to get an operating profit margin of 20%.

The 20% margin means the retailer generated 20¢ of operating profit for every $1 of net sales. Shopify’s free profit margin calculator can also calculate product-level margins using item cost and selling price. Include company-wide SG&A separately when calculating operating margin.

Operating margin vs. gross margin vs. net margin

Operating margin is one of three key profitability ratios used to evaluate a company’s performance. The other two are gross margin and net margin. When people use “profit margin” by itself, they usually mean net profit margin.

Comparing gross margin and net margin shows where operating margin sits: It subtracts more costs than gross margin but fewer than net margin.

Operating margin vs. gross margin

Gross margin measures profit after COGS but before SG&A. The difference between gross margin and operating margin is that operating margin also subtracts overhead costs. Gross margin is therefore usually higher.

Gross margin is calculated by dividing gross profit by net sales:

$20 million in net sales − $12 million in COGS = $8 million in gross profit

$8 million / $20 million x 100 = 40% gross margin

The furniture retailer’s 40% gross margin is twice its 20% operating margin.

Operating margin vs. net margin

Net margin measures profit after all expenses, including interest and taxes. It is usually lower than operating margin because it accounts for costs excluded from operating profit.

The furniture retailer has $4 million in operating profit and $1 million in interest and tax expenses:

$4 million − $1 million = $3 million in net income

$3 million / $20 million x 100 = 15% net margin

The company’s 15% net margin is lower than its 20% operating margin because it includes interest and taxes.

What is a good operating profit margin?

A good operating profit margin is positive, stable or increasing, and competitive with similar businesses. There is no target. A 10% margin can be strong for a retailer with high inventory costs and weak for a company selling digital services.

NYU Stern’s January 2026 margin data shows how average pre-tax operating margins vary across US industries:

These figures are reference points. Grocery retailers tend to have high sales volume and narrow markups. Service companies have lower inventory costs, leaving more revenue available after operating expenses. Company size, growth stage, and seasonal demand can also affect margins.

Ecommerce results vary just as widely. In a 2025 survey by the Small Business and Entrepreneurial Council (SBE), small US sellers on Amazon reported a median profit margin of 28.5%; the most commonly reported bracket was 21% to 30%. 

Stores can interpret their own figures by comparing them with businesses in the same industry and tracking changes over consistent periods. 

A rising margin usually means sales are growing faster than operating costs. On the other hand, a falling margin can signal lower prices, higher COGS, or growing overhead. Seasonal businesses can compare the same months or quarters each year.

In a 2025 Shopify survey,* 41% of store owners said they review their finances daily. Daily checks can track sales and spending, but monthly or quarterly operating-margin reviews provide a better view of profitability trends.

What affects operating profit margin?

Operating profit margin changes when revenue, COGS, or SG&A changes. Some factors come from business decisions. Others reflect market conditions that the company cannot directly control.

Internal factors that affect operating profit margin

• Production volume. Higher output can improve margin when additional sales spread fixed costs across more units. Variable costs rise with output, so higher volume improves margin only when added sales exceed added costs.
• Price. Higher prices improve margin if sales volume stays the same. Discounts reduce revenue per order unless the additional sales offset the lower price. When setting prices, distinguish markup from margin. Markup is the amount added to cost, and margin is profit as a percentage of the selling price.
• Cost of goods sold. Higher material, labor, or supplier costs narrow the margin. Lower production or purchasing costs widen it.
• Selling, general, and administrative expenses. Rent, administrative payroll, and marketing costs reduce operating profit. Margin improves when revenue grows faster than these expenses or the business lowers its overhead.
• Depreciation and amortization. These noncash expenses spread an asset’s cost over its expected useful life. For example, laptops depreciated over five years reduce operating profit during that period.

External factors that affect operating profit margin

• Economic conditions. Inflation can increase supply, labor, and overhead costs. In the National Federation of Independent Business (NFIB)’s June 2026 small business survey, 21% of owners cited inflation as their single most important problem, and a net 38% reported raising average selling prices. Margins narrow when costs rise faster than prices.
• Demand. Strong demand gives a business more room to increase sales or prices. Weak demand lowers sales volume and often leads to heavier discounting.
• Competition. Limited competition gives a company more pricing power. In a crowded market, businesses have less room to raise prices and often spend more to attract customers.

Reviewing these factors with operating margin clarifies whether a change came from company decisions or market conditions.

How to improve operating profit margin

Improving operating profit margin means increasing sales faster than operating costs, lowering COGS, or reducing SG&A. Measure the current margin with a profit and loss statement before making changes. A break-even analysis shows how much the business needs to sell to cover its fixed and variable costs.

In Deloitte’s 2026 retail industry outlook, 82% of retail executives forecast margin increases in 2026. Seventy-three percent planned gradual price increases, and 72% planned to shift their product mix toward higher-margin items.

Increase sales

Raise prices selectively, sell more high-margin products, or increase sales volume at current prices. Review contribution margin by product before investing in growth. It shows how much revenue remains after variable costs to cover fixed expenses and profit.

Business expansion can also increase sales through new products or markets. Test demand on a small scale before committing to more inventory, staff, or facilities.

Reduce COGS

Review supplier pricing, production costs, packaging, and fulfillment expenses. A retailer might consolidate purchases with one supplier to qualify for volume pricing. Savings must exceed any added inventory storage and financing costs.

Higher production volume can lower per-unit costs through economies of scale. Before increasing output, compare marginal cost (the cost of producing one more unit) with the additional revenue from selling that unit. Track the full cost of expansion, since additional labor and fulfillment expenses can offset the savings.

In an episode of Shopify Masters, Coop Sleep Goods Cofounder Kevin Chon says that following this strategy was worth the initial higher production costs. 

“In the beginning, we had to make the sacrifice of profit to make the product better,” says Kevin. “The fact that we were running such a lean team allowed us to do that. We were still profitable. 

“And so, as we scaled up and volume increased, we had more negotiating power with suppliers. It took us a couple of years to convince them. They finally came on board. Our volume increased, and so the unit economics––everything got better to a much healthier position.”

Reduce SG&A

Review recurring overhead such as rent, software subscriptions, administrative payroll, and advertising. Cut expenses that generate little value, renegotiate contracts, and automate repetitive administrative work.

Protect spending that drives profitable sales or maintains service quality. Large expense reductions can improve margins temporarily but weaken revenue later.

A 2025 Shopify survey found that 77% of store owners track total revenue, making it the most commonly tracked metric. Less than half track profit margin. But revenue alone doesn’t show whether growth is becoming more profitable.

Shopify’s built-in profit reports show costs, margins, and gross profit by product, variant, order, or POS location when a product’s cost is recorded at the time of sale. Add SG&A from accounting records to calculate operating margin. 

Third-party apps such as BeProfit and TrueProfit can account for additional expenses, including shipping, advertising, transaction fees, and custom costs.

What operating profit margin doesn’t tell you

Operating profit margin measures profitability from core operations, but it doesn’t provide a complete view of financial health. For a complete picture, review it with the business’s other financial statements. Shopify’s Analytics dashboard brings together net sales, sessions, and other performance metrics in one place, giving store owners another data point for that review.

Consider these factors:

• Nonoperating results. Investment income and other nonoperating gains affect net income but not operating profit. A company’s net income can rise even when its operating performance is flat.
• One-time costs. Restructuring, store closures, or other unusual operating expenses can reduce the margin in a given period. Compare the reported figure with prior periods and review the company’s explanation of the charge.
• Interest and taxes. Operating margin excludes interest and taxes. A business with a strong operating margin can still report low net income if it carries expensive debt or a large tax bill.
• Cash flow. Cash flow measures money entering and leaving the business. Profit includes noncash expenses such as depreciation, and it excludes some cash uses such as inventory purchases and debt repayments. Investors can use discounted cash flow to estimate the present value of expected future cash flows.
• Growth rate. A mature company can have a high operating margin and slow sales growth. However, a newer company can report a low or negative margin as it invests in staff, marketing, and expansion.
• Comparability. Margins vary by industry, company size, sales model, and growth stage. Compare businesses with similar operations and use the same reporting periods.
• Accounting choices. Inventory accounting methods, depreciation schedules, and decisions to capitalize or expense certain costs affect reported operating profit. Companies can also publish adjusted margins that exclude selected expenses, so check how each figure is defined.

*Based on a 2025 survey of 500 Shopify merchants conducted in English across Australia, Canada, the United Kingdom, Ireland, New Zealand, and the United States. Respondents were established merchants with two or more years on the platform. Results reflect the experiences of this specific sample and may not be representative of all merchants.