Industry Benchmarks of Gross, Net and Operating Profit Margins - Vena

Profit margins are a critical metric for assessing a business's financial health. Expressed as a percentage, profit margin represents how much money a company keeps for every dollar it makes.

Getting insight into the average profit margin for companies within your industry can give you an idea of your company's performance relative to your competition.

As Vena CFO Melissa Howatson pointed out in her session “The Future of Finance Leadership” at this year’s Excelerate Summit, market attitudes have shifted from relentless growth to a focus on efficiency. Companies are now scrutinizing their operations, seeking ways to optimize costs and maximize profits. 

To better understand how to make this happen, we’ll walk you through the intricacies of profit margins, with a focus on the distinctions between gross, net and operating profit margins. 

We'll also provide a breakdown of industry benchmarks for gross and net profit margins, along with actionable strategies for cost management and strategic revenue planning. 

Key Findings

• The average gross profit margin across all industries is 36.56%, while the average net profit margin is 8.54%.

• Banks (particularly money centers) have the highest average profit margins of any industry at 100% gross and 30.89% net.

• The auto and truck industry has the lowest average gross profit at 12.45%.

• Real estate development has the lowest average net profit margin at -16.35%.

Average Profit Margins By Industry

The data presented here from NYU Stern offers a snapshot of average gross and net profit margins across a wide range of industries. Gross profit margin provides a glimpse into a company’s profit after deducting the cost of goods sold (COGS), while net profit margin reflects the profit after all expenses, including taxes and interest, are subtracted.

To gain valuable insights into industry performance and competitive landscapes, let's compare average profit margins across different industries: 

A quick glance at this data reveals significant disparities across industries. For example, the apparel industry boasts an impressive gross margin of 51.93%, indicating a substantial markup on products. In contrast, sectors like auto manufacturing (12.45%) and farming/agriculture (16.49%) exhibit significantly lower gross margins, suggesting tighter profit margins after accounting for production costs.

Banking money centers boast the highest average profit margins of any industry, with 100% gross and 30.89% net. On the other end of the spectrum, the auto and truck industry has the lowest average gross profit at 12.45% while real estate development experiences the lowest average net profit margin at -16.35%.

When we focus on net profit margins, we find that trends in industries like banking and oil production reveal exceptionally high net profit margins of over 28%. Other industries, such as broadcasting and consumer electronics, report negative net profit margins, indicating losses after accounting for all costs. These stark contrasts highlight the varying levels of profitability and operational efficiency within different sectors.

10 Highest Profit Margin Industries

Dominating the list of the top ten industries with the highest profit margins are finance-focused industries, particularly the banking and investment sectors. Banks (Money Center) and Banks (Regional) claim the top two spots, boasting near-perfect gross profit margins at 100% and 99.36%, respectively, and exceptionally high net profit margins at 30.89% and 29.67%, respectively. 

This is largely due to their unique business model, which involves leveraging customer deposits to generate loans and investments, often with minimal associated costs. The financial services industry's ability to manage risk effectively and generate significant returns on capital may also contribute to its high profitability.

Following closely behind are sectors like retail real estate investment trusts (REITs), SaaS, investment management and pharmaceuticals. These high profit margin businesses often share common characteristics: 

• High barriers to entry

• Strong brand recognition

• Intellectual property protection

• Pricing power

For instance, pharmaceutical companies benefit from extensive research and development investments, which lead to patented drugs with high profit margins. Similarly, SaaS companies can enjoy recurring revenue streams and high profit margins due to low production costs and strong customer loyalty.

10 Lowest Profit Margin Industries

Occupying the bottom rungs of the profitability ladder are sectors such as auto manufacturing, chemical production, engineering, and construction. These industries are characterized by intense competition, high capital requirements, and, often, cyclical market conditions. 

For instance, the automotive industry faces fierce global competition, substantial investments in research and development, as well as fluctuating raw material costs. Similarly, the chemical industry is capital-intensive and subject to environmental regulations, which can erode profit margins.

The contrast between these industries and the highest profit margin businesses is striking. While financial services and technology firms often benefit from intangible assets, intellectual property and economies of scale, industries like manufacturing and construction rely more on tangible assets, commodity pricing and operational efficiency. These factors contribute to the significant disparity in profitability across industries.

It's important to note that low profit margins do not necessarily equate to poor performance. Maintaining profitability in construction and other industries on this list is possible. Many of these industries play critical roles in the economy, providing essential goods and services. However, understanding the factors driving these lower margins is crucial for businesses operating in these sectors to develop effective strategies for survival and growth. 

Gross, Net and Operating Profit Margins

While all profit margins provide useful information, there are some key distinctions between gross margin, net margin and operating margin. Gross margin focuses on the profitability of core operations, excluding overhead and taxes. In contrast, net margin reflects overall profitability after considering all expenses. 

By understanding the nuances of these profit margins and other financial KPIs worth monitoring, businesses can gain a comprehensive view of their financial performance and make informed decisions.

Determining what a good profit margin is often depends on your industry, company size and other factors such as economic conditions, location and operational efficiency.

Gross Profit Margin

Gross profit margin measures a company’s profitability by subtracting its COGS from total revenue. Essentially, it reveals how much revenue is left over after covering the direct costs of producing or purchasing goods.

To calculate gross profit margin, divide the gross profit (revenue minus COGS) by the total revenue and multiply by 100 to express it as a percentage. 

(Gross profit / Total revenue) x 100 = Gross profit margin

For example, if a company has a revenue of $100,000 and a COGS of $60,000, its gross profit is $40,000. The gross profit margin would be ($40,000 / $100,000) * 100 = 40%.

Having a high gross profit margin signifies that a company is efficiently managing its production or purchasing costs and can allocate more resources toward operating expenses, research and development or debt repayment. A low gross profit margin could indicate pricing pressures, inefficiencies in the production process or rising costs of goods sold.

Net Profit Margin

Net profit margin measures the percentage of revenue that turns into profit after all expenses, including operating costs, interest and taxes, have been deducted.

To calculate net profit margin, you divide the net income (profit) by the total revenue and multiply by 100. For example, if a company has a net income of $20,000 and a total revenue of $100,000, its net profit margin is 20%.

(Net profit / Total revenue) x 100 = Net profit margin

Net profit margin is considered a more comprehensive measure of profitability than gross profit margin. A high net profit margin suggests efficient operations, effective cost management and strong pricing power. 

Operating Profit Margin

Operating profit margin measures a company's profitability based on its core operations. It shows how efficiently a company generates profit from its primary business activities. 

To calculate the operating profit margin, you divide operating income (revenue minus operating expenses) by total revenue and multiply by 100. For example, if a company has an operating income of $30,000 and a total revenue of $150,000, its operating profit margin is 20%.

(Operating profit / Total revenue) x 100 = Operating profit margin

Because operating profit margin excludes non-operating income and expenses such as interest and taxes, it provides a clearer picture of how well a company manages its core business activities. A high operating profit margin suggests that a company effectively controls costs and generates profit from its primary operations.

To help you track your operating expenses for these calculations, download our free operating budget template for Excel.

Why Industry Profit Margins Matter

By comparing your company's profit margins to industry averages, you can benchmark your business’ position, uncover opportunities for growth and make data-driven decisions.

Monitoring profit margins over time helps you track your company's progress towards operational efficiency, identify trends and adjust strategies accordingly.

Profit margin analysis also offers a wealth of insights. It’s useful for:

• Benchmarking against competitors

• Setting realistic financial goals

• Evaluating pricing strategies

• Assessing operational efficiency

• Identifying areas for cost reduction

Additionally, profit margins are crucial for investors, lenders and other stakeholders who rely on this information to assess a company's financial health and investment potential.

Strategies for Boosting Your Bottom Line

While examining profit margins provides useful insights, you’ll want to take proactive steps to enhance your business’s profitability long-term. Let’s explore some strategies for optimizing your margins by driving revenue growth and identifying cost-saving opportunities. 

Increasing Revenue Through Diversification

A robust revenue growth strategy goes beyond simply selling more of the same products to the same people. 

• Price Optimization: This strategy involves finding the sweet spot between maximizing revenue and maintaining customer satisfaction. Implementing a strategic pricing strategy involves carefully analyzing customer demand, competitor pricing and production costs to determine the optimal price point for your products or services.

• Expanding Product or Service Offerings: Adding complementary offerings can attract new clientele and expand your revenue base. Conducting thorough market research to identify potential opportunities and customer needs is crucial for successful product or service expansion.

MountainSeed, a Georgia-based real estate consultancy, successfully leveraged FP&A data insights to support product expansion. By analyzing detailed financial information, they were able to identify profitable opportunities and allocate resources effectively, ultimately growing their product offerings from a single product to nine revenue-generating lines.

• Understanding Your Customer Segments: Identifying untapped customer segments can unlock significant revenue potential. By understanding which of your customer sets are driving the most revenue, you can better determine where your business should be doubling down its efforts.

Hunter Fan Company introduced reporting that allows them to identify high-value customers to nurture them strategically and allocate their resources accordingly. For instance, by reporting on contribution margin per customer with the help of Vena, Hunter Fan was able to see that their ecommerce segment was driving significant value.

Minimizing Costs for Greater Financial Efficiency

To maximize profitability, businesses must also focus on reducing operational expenses. 

• Cost Efficiency Measures: Eliminating waste in production and operations directly impacts the bottom line. This involves streamlining processes, reducing energy consumption, minimizing inventory levels, and optimizing resource allocation. For example, implementing lean manufacturing principles can significantly reduce production costs.

Mitsubishi Chemical Group achieved this through automated data consolidation via Vena’s solutions, eliminating manual tasks, streamlining processes, and revealing hidden cost drivers. This newfound efficiency led to significant cost reductions and improved overall profitability.

• Tying Operational Metrics to Financial Results: Especially for businesses with complex operations based on navigating supply chains and managing the movement of physical goods, it’s important to consolidate both operational and financial metrics in one place.

Metro Supply Chain Group (MSCG), a third-party logistics provider is giving their customers a greater understanding of their costs at the individual order level, thanks to Vena’s single source of truth and easy-to-understand visual reports. “Operational metrics are important, but the story is not complete until you can see how they impact your costs, revenue and EBITDA margins,” says Paolo Mari, VP of Business Analytics and Commercial Management at MSCG. 

• Supplier Negotiation and Management: Building strong relationships with suppliers and negotiating favorable terms can lead to substantial cost savings. Businesses can secure better pricing and improve overall profitability by consolidating purchases, increasing order volumes, or exploring alternative suppliers.

Plan Your Path to Profitability

As 36% of CFOs report that their financial planning and analysis (FP&A) teams alter their forecasts at least weekly, they require a robust toolkit to effectively and efficiently manage the business’s financials.

To optimize budgeting, forecasting, cost control and overall financial performance, FP&A professionals rely on a combination of methodologies and technologies.

Budgeting and Forecasting Techniques

Effective budgeting and forecasting are foundational to FP&A. Key techniques include:

• Zero-based budgeting: Allocating resources based on current needs rather than historical spending.

• Rolling forecasts: Continuously updating forecasts to reflect changing market conditions.

• Scenario planning: Developing multiple financial projections under different economic scenarios.

• Driver-based forecasting: Analyzing key performance indicators (KPIs) to predict future outcomes.

Cost Tracking and Analysis

To identify cost drivers and implement effective cost control measures, FP&A teams employ the following:

• Activity-based costing: Assigning overhead costs to specific activities to improve cost accuracy.

• Variance analysis: Comparing actual performance to budgeted figures to identify deviations.

• Root cause analysis: Investigating the underlying reasons for cost variances to implement corrective actions.

• Cost benchmarking: Comparing costs to industry standards to identify areas for improvement.

Leveraging Technology for Cost Management

Technology plays a crucial role in modern FP&A. Tools and platforms such as:

• ERP systems: Integrating financial data with operational processes for holistic analysis.

• Business intelligence (BI) and data visualization tools: Transforming complex data into actionable insights.

• Cloud-based FP&A platforms: Enabling flexible analysis and real-time collaboration and agility.

• Advanced analytics and machine learning: Predicting future trends and optimizing decision-making.

Optimize Profitability Through Data-Driven Insights

By understanding the nuances between gross, net and operating profit margins by industry, businesses can gain valuable insights into their performance relative to industry benchmarks. To enhance profitability, a strategic focus on both revenue growth and cost optimization is essential.

Leveraging the right tools and techniques is crucial for effective financial planning and analysis. To streamline these processes and gain a competitive edge, consider investing in financial reporting software.

With greater visibility into the company’s performance—without the headache of manual consolidations and disparate systems—you can unlock your company's full profit potential.