To calculate net profit margin, divide your net profit by your revenue for the same period and multiply by 100. The result is the percentage of every sale you keep once all expenses, interest and taxes are paid.
Xero writes the formula as net profit margin = (net profit / revenue) x 100, and CFI's version is net income / revenue x 100. Net profit and net income are the same figure. Shopify's simplest example: $100,000 of revenue in a year with $65,000 spent on overheads and inventory leaves $35,000 of profit, a 35% net profit margin. You keep 35 cents of every dollar. All the figures on this page are the sources' own US dollar examples, as of October 2026.
Where the figures come from
Both numbers sit on your profit and loss statement. Net profit is the bottom line, which is why people call it that. Shopify breaks the expenses you subtract from net sales into four groups:
| Expense group | What it covers | Where to find it |
|---|---|---|
| Cost of goods sold | The direct cost of producing or buying what you sell | Income statement |
| Operating expenses | Overheads such as rent, payroll, insurance and marketing | Income statement or accounting software |
| Non-operating expenses | Interest on debt, asset write-offs, restructuring or disaster costs | Loan statements or the income statement |
| Tax | Income tax | Income statement or tax filings |
So net profit = net sales - COGS - operating expenses - non-operating expenses - tax. Net sales means revenue after returns, discounts and allowances. If your figures aren't in one place yet, this profit and loss template lays them out in the right order.
Worked example 1: Shopify's beauty supply store
A specialty beauty supply store records these figures for a quarter:
| Line | Amount |
|---|---|
| Net sales | $75,000 |
| COGS | $20,000 |
| Rent | $20,000 |
| Insurance | $7,500 |
| Non-operating expenses | $2,500 |
| Income tax | $5,500 |
| Net profit | $19,500 |
$19,500 / $75,000 x 100 = a net profit margin of 26%.
Worked example 2: Xero's bakery
Xero uses a fictional bakery, Sweet Flour, with $120,000 of revenue for the quarter:
- Add up all expenses: $40,000 COGS + $50,000 operating expenses + $2,000 loan interest + $7,000 tax = $99,000.
- Subtract them from revenue: $120,000 - $99,000 = $21,000 net profit.
- Divide by revenue: $21,000 / $120,000 = 0.175.
- Multiply by 100: a net profit margin of 17.5%.
Worked example 3: CFI's T-shirt retailer
CFI's XYZ Company sells custom-printed T-shirts online. Revenue is $700k, COGS is $200k and all other expenses, including selling, general and admin costs, interest and taxes, come to $400k. That leaves $100k of net income, so the net margin is $100k / $700k = 14.3%. The same business has a gross margin of 71.4%, which shows how much the overheads below the gross line take.
What counts as a good net profit margin? The sources disagree
This is where you need to be careful whose benchmark you quote:
| Source | Low | Average or healthy | High |
|---|---|---|---|
| CFI | 5% | 10% is average | 20% |
| Xero (small businesses) | 5% or below | 10% is healthy | 20% or above is strong |
They use the same numbers but read them differently. To CFI, 10% is ordinary. To Xero, 10% or higher is healthy for a small business. Both say industry matters more than any rule of thumb. Xero notes that food service and retail often run on thinner margins of 3% to 9%, while service businesses tend to earn more because they carry fewer material costs.
Shopify quotes NYU Stern's January 2026 averages, which show how wide the range is:
| Industry | Average net profit margin |
|---|---|
| Retail (grocery and food) | 1.32% |
| Apparel | 3.85% |
| Retail (general) | 5.61% |
| Healthcare products | 9.61% |
| Software (system and application) | 25.49% |
| All industries | 9.74% |
Shopify's own answer to "is 7% good?" sums it up: close to the all-industry average, great for apparel and low for software.
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Read the trend, not just the number
Shopify's most useful warning is about direction. A shrinking margin while revenue is rising means your costs are growing faster than your sales. That's easy to miss when the top line looks healthy. The margin also helps you set prices against a target, and investors and lenders weigh it alongside return on investment.
Shopify lists four things that distort it. Financing: two stores that perform identically can show different margins because one carries more debt. Tax: business structure and location change the tax bill. Seasonality: one strong holiday quarter can flatter the figure. One-off items: selling a large asset can inflate profit for a single period. That's why Shopify suggests looking at a full year and pairing the net margin with operating margin. Earnings before interest and tax is the same as operating profit, and this guide to EBITDA explains the related measure.
The other margin ratio in this series is gross margin, which only subtracts COGS. For the difference between the two in currency terms, read gross profit vs net profit.
How to improve it
Xero's list is short: increase revenue, cut unnecessary expenses, adjust your pricing and use accounting software to track your numbers in real time. It also suggests reviewing your profit and loss monthly rather than quarterly or yearly, so you spot trends early. Shopify adds that 79% of store owners in its 2025 survey use profits to self-fund growth, which only works with a positive net margin.
My take
Calculate it every month and watch which way it's heading. A single benchmark won't tell you much, because CFI and Xero can't even agree what 10% means. Your own trend will. If revenue's up and the margin's down, find the cost that's growing before you do anything else.
Frequently asked questions
What is the formula for net profit margin?
Net profit margin = (net profit / revenue) x 100. Net profit is revenue minus COGS, operating expenses, non-operating expenses such as interest, and tax.
What is a good net profit margin?
It depends on the source and the industry. CFI calls 10% average and 20% high, while Xero says 10% or higher is healthy for small businesses.
Is net profit the same as net income?
Yes. Both mean revenue minus every expense, including interest and taxes.
Why is my net profit margin falling when sales are rising?
Shopify says a shrinking margin while revenue rises shows your costs are growing faster than your sales, so look at COGS and overheads first.
