A 15% profit margin is excellent for a restaurant and mediocre for a software freelancer. The right benchmark for your small business depends entirely on your industry, because different industries carry very different cost structures. This guide gives you the net profit margin benchmarks that actually matter for your sector, shows you how to calculate your own margin, and walks through a worked example.
What is a good profit margin for a small business?
A net profit margin of around 10% is generally considered good for a small business, 5% or below is usually weak, and anything approaching 20% is strong. These are only averages, though. For sourced UK figures by sector, see our industry profit margin benchmarks. What counts as good varies widely by industry: professional services firms routinely hit 15-20%, while grocery stores survive on 1-3%. Always compare yourself against businesses like yours, not against a single magic number.
This is the figure lenders and buyers care about. A lender reviewing a small business loan typically looks for a net margin of at least 10%, and expects it to be roughly in line with your sector’s norm. A 6% margin that is double your industry average tells a better story than a 12% margin that is below it.
Gross, operating, and net margin: compare the right numbers
People talk about “profit margin” loosely, but there are three layers, and mixing them up makes benchmarks meaningless:
Gross margin = (Revenue − Cost of goods sold) ÷ Revenue × 100. This shows what you keep after the direct cost of what you sell.
Operating margin = Operating profit ÷ Revenue × 100. This subtracts operating costs like rent, wages, and software, but not interest or tax.
Net margin = Net profit ÷ Revenue × 100. This is the bottom line after everything, and it is the number most benchmarks quote.
NYU Stern’s January 2025 sector data shows how wide the gap between layers can be: business and consumer services firms average 33.70% gross margin but only 7.09% net margin, while restaurants average 32.90% gross but 10.62% net. The overhead between gross and net is where most small businesses live or die.
When you read a benchmark, check which layer it uses. Run your own number with LancerBill’s profit margin calculator and compare like with like.
Net profit margin benchmarks by industry
The table below combines widely cited industry benchmarks from lender and accounting sources. Treat them as typical ranges for small businesses, not guarantees. Your exact figure depends on size, location, and how efficiently you operate.
| Industry | Typical net profit margin | Why |
|---|---|---|
| Software and technology | 15-25% | Low variable costs, digital products scale cheaply |
| Professional services (law, accounting, consulting) | 12-20% | Labor-heavy but low inventory and overhead |
| Healthcare and medical | 10-18% | Steady demand but high overhead and regulation |
| Manufacturing | 5-10% | Capital-intensive; efficiency lifts margins |
| Construction | 3-8% | Thin margins are the industry norm; competitive bidding |
| Transportation and trucking | 3-7% | Fuel and maintenance costs dominate |
| Restaurants and food service | 3-6% | High labor and ingredient costs, fierce competition |
| Retail (general) | 2-5% | Inventory costs and price competition compress margins |
| Grocery stores | 1-3% | Volume-based; perishable stock, razor-thin pricing |
| Coffee shops | 2-5% | Rent and staffing eat the margin; add-ons help |
These ranges echo the patterns in NYU Stern’s data: net margins under 5% are normal in food wholesaling, transport, and retail, while service businesses cluster higher. Sources: Crestmont Capital’s small business lending benchmarks, Korona POS retail benchmarks, and NYU Stern sector data via Paro.
Tip: If you sell goods, calculate margin per product as well as for the business overall. One bestseller can mask a shelf of products that barely break even. This distinction is why markup thinking belongs in your pricing toolkit too, as our guide on profit margin vs markup explains. Once your margin looks healthy, check it against the sales volume you actually need with our break-even point guide.
Freelancers and consultants: your margins run higher
If you sell your own time and expertise rather than goods, expect much higher margins, because your cost of goods sold is close to zero. UK accounting benchmarks put typical net profit margins for freelancers (after business expenses, before personal tax) at:
- IT contractors and developers: 30-45%
- Consultants and business advisors: 35-50%
- Marketing and creative professionals: 25-40%
- Design and creative services: 25-40%
- Writing and content creation: 20-35%
These come from Business Accounting’s UK freelancer benchmarks, based on their work with hundreds of freelance clients. A consultant landing 15% is not celebrating a “good” margin here; for them it is a red flag that expenses or underpricing are leaking money.
The reason is structural. A freelancer’s main expense categories are software subscriptions, insurance, home office costs, which typically total far less than a retailer’s stock, rent, and staff bills. That does not mean the money is free: your time is the uncounted cost, which is why your hourly rate has to cover everything a salaried job would.
Worked example: is a 12% net margin good for a small retailer?
Take a small online boutique selling handmade home goods. Last year it made £120,000 in sales. Here is how to check its margin step by step:
Step 1: total all costs. Stock and materials £55,000, marketplace and payment fees £12,000, rent and utilities £9,600, marketing £7,200, packaging and shipping £6,800, insurance and accountancy £2,400. Total costs = £93,000.
Step 2: net profit. £120,000 − £93,000 = £27,000.
Step 3: net margin. £27,000 ÷ £120,000 × 100 = 22.5%.
At 22.5% this business looks strong against general retail’s 2-5% range, but boutique retail with premium handmade goods typically runs 5-10%. Two things are worth checking: is the owner paying themselves a market-rate salary out of that £27,000 (unpaid owner labor inflates the margin), and is marketing spend high enough to sustain growth? If the owner took a fair £30,000 salary, the “margin” would actually be negative, which tells a very different story.
Watch out: The most common margin mistake small owners make is forgetting their own labor. If you work 50 hours a week and pay yourself nothing, your profit figure includes a hidden wage. Always add a market-rate owner salary to your costs before judging your margin.
How to calculate your margin and compare it properly
Use this five-step routine once a quarter:
1. Pull clean revenue. Total sales for the period, before refunds and returns are stripped out. Refunds go below the line as a cost, so your revenue figure stays honest.
2. List every cost. Direct costs (materials, subcontractors, payment fees) plus operating costs (rent, software, insurance, marketing, accountancy, owner salary). Miss nothing; small subscriptions add up.
3. Calculate all three margins. Gross shows whether your pricing covers direct costs. Net shows the bottom line. Track the trend over quarters, not just one snapshot.
4. Benchmark against your sector. Compare your net margin to the industry range above. If you are far below your sector, the first suspects are underpricing, unpriced scope creep, and overhead you have not reviewed in a year.
5. Price from the margin, not toward it. Decide the margin you want, then set prices to hit it: Price = Cost ÷ (1 − Target margin). For a product costing £40 to make with a 25% target margin, price at 40 ÷ 0.75 = £53.33. Test scenarios in the profit margin calculator and check what each sale volume means for survival with the break-even calculator.
If you are rethinking your numbers from scratch, our guide on how to price handmade products walks through building a price from real costs, step by step.
How to improve a below-average margin
You have three levers, in order of how fast they work:
Raise prices first. Most under-margined businesses are simply underpriced. A 5% price increase on a 10% margin lifts profit by 50% if volume holds. Test increases on new clients before touching existing ones.
Cut the costs you have not audited in a year. Subscriptions, insurance renewals, and supplier terms drift upward quietly. Renegotiating one supplier contract can move your margin a full point.
Drop or fix your worst-margin work. The clients and products that generate the most complaints usually carry the thinnest margins too. Firing the bottom 10% of your revenue can raise your overall margin without raising a single price.
Rule of thumb: improve margin by 1 point a quarter and you will double a 5% margin in under two years. Small moves compound; one desperate price hike usually does not.
Key takeaways
- Around 10% net margin is a good general benchmark; under 5% is weak and near 20% is strong.
- Always compare within your industry: software and professional services run 12-25%, retail and food run 1-6%.
- Freelancers and consultants should target 25-50%, because their cost base is much lighter.
- Pay yourself a market-rate salary before judging your margin, or the number lies.
- Price from your target margin using Price = Cost ÷ (1 − Margin), then track the trend quarterly.
FAQs
What is a good profit margin for a small business?
A net profit margin of about 10% is widely considered good for a small business, with 5% or below seen as weak and 20% or above seen as strong. The right benchmark depends on your industry: service businesses and freelancers normally achieve much higher margins than retailers or restaurants.
What is the average profit margin for a small business?
There is no single average, because margins vary so much by sector. Typical net margins range from 1-3% for grocery stores and 2-5% for general retail, up to 12-20% for professional services and 15-25% for software businesses, according to lender and accounting benchmarks.
What is a good profit margin for a freelancer?
UK benchmarks suggest freelancers should target net profit margins of 20-50% depending on profession: IT contractors 30-45%, consultants 35-50%, creatives 25-40%, and writers 20-35%, after business expenses but before personal tax.
Is a 20% profit margin good?
Yes, a 20% net profit margin is strong for almost any small business. It sits well above the averages in retail, food, construction, and transport, and is solid even in higher-margin sectors like professional services and software.
What is the difference between gross and net profit margin?
Gross margin measures profit after only the direct cost of what you sell, while net margin measures profit after every cost, including rent, wages, interest, and tax. Gross margin is always higher; net margin is the figure most benchmarks use.
This guide is for general information only and is not financial, tax or legal advice. Benchmark figures reflect widely cited industry sources; your own figures depend on your business model and costs.