Net margin
What the business actually keeps after every cost, as a percentage of revenue — the number gross margin flatters.
Net margin is what the business keeps after every cost, not just the direct ones: revenue minus all expenses, divided by revenue. Gross margin tells you whether the work is worth doing; net margin tells you whether the business around the work is worth running.
The gap between the two is where most of the surprise lives. A practice at 60% gross margin and 6% net margin is not badly priced — it is carrying an overhead that nobody re-approves. Software, rent, a part-time role added during a busy quarter, the accountant, the insurance: each is defensible alone and together they eat nine tenths of the margin the work produced.
The trap is measuring net margin only once a year, when the accounts are filed. By then the decisions that set it were made eleven months ago. A quarterly read is enough to notice a trend, and a trend is the only actionable form this number takes.
Worked: $300,000 of revenue, $120,000 of direct delivery cost, so gross margin is 60%. Overheads run $162,000 — two thirds payroll, the rest tools, rent and professional fees. Profit is $18,000, a net margin of 6%. Adding one $40,000 client at the same gross margin adds $16,000 of profit and moves net margin to 10%, because the overhead does not move.
Also known as
- net profit margin
- bottom line
Relevant for
- Creators
- Your net margin is the honest answer to whether the channel is a business or a job: count the editor, the tools and the hours before you decide the last launch went well.
- Business owners
- A widening gap between gross and net margin means the overhead grew faster than the work — the fix is a quarterly line-by-line, not a busier month.