What is operating margin?
Operating margin (also called EBIT margin) measures what percentage of revenue remains after paying all operating costs — COGS plus operating expenses — but before interest and taxes. It is the purest measure of a business's operational efficiency because it strips out financing decisions (interest) and tax jurisdiction differences.
What is the difference between operating margin and net margin?
Operating margin stops at EBIT (Earnings Before Interest and Taxes). Net margin subtracts interest expense and income taxes from EBIT. The gap between the two reflects a company's debt load and tax burden. A company with the same operating margin but more debt will have a lower net margin.
What is a good operating margin?
Operating margin benchmarks vary dramatically by industry. SaaS companies at scale target 20-30%+. Professional services typically run 15-25%. Manufacturing runs 5-15%. Retail and grocery are often under 5%. The most important thing is comparing your operating margin to industry peers, not to an absolute standard.
How do I improve my operating margin?
Operating margin can be improved from two directions: increasing revenue without proportionally increasing costs (operating leverage), or reducing costs without sacrificing revenue. The highest-leverage levers are typically: increasing pricing, improving product mix toward higher-margin offerings, reducing headcount through automation, and renegotiating supplier contracts.