How margins work, why industry context matters, and how to monitor movement
Somewhere along the way, someone tells you a number.
“A good business runs on a 20% margin.”
It sticks in your head. And now every time you look at your own numbers, you're measuring yourself against a figure that may have nothing to do with your industry.
The short answer
There is no single healthy margin that applies to every business. A margin that would be excellent for a supermarket would be catastrophic for a software company, and vice versa. What matters far more than hitting a universal benchmark is knowing your own margin, watching how it moves, and understanding what's normal for your specific industry.
Gross margin vs net margin — know which one you're talking about
Gross margin is gross profit as a percentage of revenue — what's left after the direct cost of what you sold, before overheads.
Net margin is net profit as a percentage of revenue — what's left after everything, including rent, wages and admin.
A business can have a strong gross margin and a thin net margin — that's a sign overheads are heavy relative to sales. The two numbers together tell a more complete story than either alone.
Why industry context matters more than a fixed number
| Industry type | Typical margin pattern |
|---|---|
| Retail / grocery | Low margins, high volume — profitability comes from turnover, not markup |
| Trades and construction | Moderate margins, heavily affected by material costs and job pricing accuracy |
| Hospitality | Thin margins, tightly squeezed by food/labour costs and fixed overheads |
| Professional services | Higher margins — the main cost is time, not physical goods |
| Software / digital | Very high gross margins — the marginal cost of an extra sale is often small |
Comparing your margin against a business in a completely different industry tells you almost nothing useful. Comparing it against businesses genuinely like yours — and against your own past performance — tells you a great deal.
The ATO's own benchmark tool
The Australian Taxation Office publishes small business benchmarks by industry, letting you compare your performance — including cost of sales and expenses as a percentage of turnover — against similar businesses. business.gov.au points specifically to these ATO benchmarks as a way to check whether your business sits within the expected range for your industry.
What actually matters more than the number itself
The trend. A margin that's slowly shrinking, even if it's still technically “normal,” deserves attention before it becomes a real problem.
The reason behind a change. A dip because you deliberately invested in better materials or staff is very different from a dip because costs crept up unnoticed.
Consistency. A margin that swings wildly month to month often points to inconsistent pricing or poor cost control, even if the average looks fine.
A quick self-check
Do I know my current gross margin and net margin, as percentages, not just dollars?
Have I compared myself against ATO benchmarks for my specific industry?
Is my margin trending up, down, or holding steady over the last six to twelve months?
If it's moved, do I know why?
Free official resource
The ATO publishes small business benchmarks by industry to help you compare your performance.
ato.gov.au — Small business benchmarks https://www.ato.gov.au/businesses-and-organisations/small-business-benchmarks
When should you get professional help?
you're not sure what a realistic margin looks like for your specific industry;
your margin has been trending down and you can't pinpoint why;
you're setting prices for a new product or service and want to build in a sustainable margin from the outset; or
you want a proper benchmark comparison rather than a general rule of thumb.
Continue learning
→ Revenue, Gross Profit, Net Profit and Cash — What's the Difference?
→ Is My Business Actually Profitable?
→ Should I Increase My Prices — and How Do I Know?
SKC Accounting | Knowledge Centre | Knowledge Guide 014
Last reviewed: August 2026
General information only. This guide does not take into account your individual circumstances and is not a substitute for professional accounting, taxation, legal or financial advice.