Profitability
How to Calculate Operating Margin: Formula, Example, and Benchmarks
Operating margin tells you how profitable your core business operations are, before financing and taxes. It's a more complete picture than gross margin because it accounts for all the costs of running the business.
The Operating Margin Formula
Where Operating Profit (also called EBIT) = Revenue − COGS − Operating Expenses.
Operating expenses include: rent, salaries and wages, marketing and advertising, insurance, software subscriptions, utilities, office supplies, professional fees, and depreciation. They exclude: interest expense, income tax, and one-time gains or losses.
Step-by-Step Example
| Line Item | Amount | Calculation |
|---|---|---|
| Revenue | $500,000 | Total sales |
| − COGS | ($200,000) | Materials, direct labor, shipping |
| = Gross Profit | $300,000 | 60% margin |
| − Operating Expenses | ($210,000) | Rent $60K, salaries $100K, marketing $30K, other $20K |
| = Operating Profit | $90,000 | $300K − $210K |
| = Operating Margin | 18% | $90K ÷ $500K |
This means 18 cents of every dollar remains after covering all operating costs. The company then pays interest and taxes from this $90,000 operating profit to arrive at net income. Use our profit margin calculator to run your own numbers.
Operating Margin vs Other Profit Metrics
| Metric | Formula | Includes OpEx? | Includes Interest/Tax? |
|---|---|---|---|
| Gross Margin | (Rev − COGS) ÷ Rev | No | No |
| Operating Margin | (Rev − COGS − OpEx) ÷ Rev | Yes | No |
| Net Profit Margin | Net Income ÷ Rev | Yes | Yes |
| EBITDA Margin | EBITDA ÷ Rev | Yes (excl. D&A) | No |
See our guides on EBITDA explained and gross margin vs net margin.
Industry Benchmarks
| Industry | Typical Operating Margin | Why |
|---|---|---|
| Software / SaaS | 20-30% | High gross margins, scalable cost structure |
| Consulting | 15-25% | Labor-driven, moderate overhead |
| Manufacturing | 10-20% | Capital-intensive, high depreciation |
| Restaurant | 5-15% | High labor + food costs, thin margins |
| Retail | 5-10% | High rent + inventory carrying costs |
| Construction | 5-12% | Project-based, variable overhead |
Source: IBISWorld (2026), NYU Stern Damodaran margin dataset.
Related Calculators
Frequently asked questions
What is the difference between operating margin and gross margin?+
Gross margin only considers COGS (direct costs). Operating margin subtracts both COGS and operating expenses (rent, salaries, marketing, insurance). Operating margin is a more complete measure of business profitability because it accounts for all the costs of running the business, not just product costs.
What is considered a good operating margin?+
It varies by industry. Software companies often achieve 20-30% operating margins. Service businesses average 15-25%. Retail typically runs 5-10%. Restaurants average 5-15%. Manufacturing firms target 10-20%. Any positive operating margin means your core business is profitable. Below 5% means thin margins with little room for error.
Can operating margin be higher than gross margin?+
No. Operating margin is always lower than gross margin because it subtracts additional expenses (operating expenses). If operating margin appears higher, it means the calculation is wrong — you're missing some COGS or double-counting revenue. Operating margin = gross profit - operating expenses / revenue, so it must be lower.
How do I improve my operating margin?+
Two levers: increase revenue without proportionally increasing operating costs, or reduce operating expenses. Specific strategies: raise prices (improves revenue without cost change), automate repetitive tasks (reduces labor costs), negotiate rent and supplier contracts, cut low-margin products, and improve marketing ROI to lower customer acquisition costs.
Is operating margin the same as EBITDA margin?+
EBITDA margin is similar but adds back depreciation and amortization. Operating margin (also called EBIT margin) includes depreciation and amortization as expenses. EBITDA margin is often slightly higher than operating margin, especially for capital-intensive businesses with significant equipment depreciation.