What is Operating margin?
Operating income as a percentage of revenue — measures core profitability before financing and tax effects.
Operating margin is the percentage of revenue that becomes operating income, after deducting cost of goods sold and operating expenses but before interest and taxes.
How to calculate
Operating margin = Operating income / Revenue
= (Revenue - COGS - Operating expenses) / RevenueWhat "good" looks like by industry
- Restaurants: 3–6%
- Construction: 5–10%
- Retail: 4–9%
- Manufacturing: 8–15%
- Professional services: 15–30%
- SaaS (mature): 20–40%
- Software (early): often negative as growth absorbs investment
Why it matters
Operating margin filters out two distortions that net margin includes:
- Financing decisions (interest expense varies with leverage)
- Tax jurisdiction (corporate tax rates differ)
This makes operating margin the right metric for comparing operational efficiency across companies, locations, or time periods.
When margin compression is hiding leaks
If your operating margin has dropped 200+ basis points year-over-year without an obvious cause (price war, input shock, expansion investment), the culprit is usually one of: vendor cost creep, dormant SaaS subscriptions, payroll inefficiency, or unmonitored fee drift. All recoverable.
Related terms
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