Net Profit Margin Explained

Ana Gotter on February 08, 2024

SaaS brands and startups alike are known for their potential when it comes to rapid growth. Net profit and revenue can change rapidly, scaling up and down dramatically alongside growing subscriber lists.

While increased net profit and revenue are always good to see, it’s also important to understand underlying profitability trends, especially when you’re trying to understand true revenue trajectories for your business. 

While there are plenty of financial metrics that subscription businesses should track, net profit margin can provide an unbiased look into what’s happening with your revenue, even as your business scales up or down. 

What is a Net Profit Margin? 

Net profit margin— also sometimes called your “net profit margin ratio” or “profit margin"— is a financial metric that helps you determine how much profit you’re producing from your total revenue. It’s expressed as a percentage, so even as your revenue and profit may rise and fall, you’ll have a percentage to track profitability. 

As a quick recap, here are a few important definitions to keep track of:

  • Net profit: The amount of income that remains after accounting for all operating costs and debts, along with additional income streams. 
  • Revenue: The total amount of income generated by sales of the goods and services that relate to a company’s prime operation. 

How Net Profit Margin Differs From Net Profit

Your net profit margin relies on net profit for its calculation, but they are two separate metrics.

Your net profit, as we discussed above, is the amount of income that remains after you’ve subtracted all operating costs and debts.

Net profit margin, on the other hand, assesses how your net profit relates to your revenue. It’s expressed as a percentage to help you keep track of net profit rises and falls compared to revenue over a period of time, even as your business scales up and down.

Net Profit Margin vs. Gross Profit Margin: What’s the Difference? 

Net profit margin looks at your net profit (which is income that remains after accounting for all operating costs, debts, and additional income streams) related to revenue.

Gross profit margin, on the other hand, compares gross profit to revenue. 

Gross profit is the amount of money you’re left with after deducting the costs of goods sold from revenue. 

Note that cost of goods sold is not operating costs, like those included with a business’s SaaS software, marketing campaigns, and lease agreements. In a SaaS company, 'Costs of Goods Sold (COGS)' primarily includes expenses directly tied to the delivery of the software service. This covers server and infrastructure costs, expenses for third-party services and APIs, payment gateway charges and direct costs associated with customer support and software maintenance.

How to Calculate Net Profit Margin 

First, before we calculate net profit margin, let’s look at the net profit formula:

Gross profit - Operating expenses and taxes = Net profit 

And as a reminder:

Revenue - Costs of goods sold = Gross profit

Once you’ve used your gross profit to find your net profit, this is the net profit margin formula you need:

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

Let’s look at an example of how to use the net margin formula. 

If your net profit was $350,000 and your total revenue was $500,000, you’d divide 350,000 by 500,000 and multiply it by 100 to give you 70%

Why Net Profit Margin Matters 

Your net profit margin is a good key metric to watch over time for SaaS brands.

With many startups and SaaS companies, you’ll ideally see revenue grow and the business scale… but so can expenses.

It’s helpful to track your profit margin percentage to see how your actual profitability is changing over time. Some ups and downs are expected as fluctuations in business expenses and revenue are both natural, but you definitely want to be aware of trends in either direction. 

Let’s look at an example.

Say that in January of this year, you are making $50,000 in revenue and by December you’re making $300,000 in revenue. That’s a great sign, but maybe your expenses impacting net profit have also jumped during that time from $5,000 to $80,000.  

So, your net profit margin went from 90% to 26% due to the dramatic increases in costs. Even while overall revenue is much higher in December, your net profit margin is lower. 

Good Net Profit Margins for SaaS Businesses

Financial metrics often vary significantly depending on the size and industry of the business in question.

In general, however, your gross profit margin should aim to be around 70-80% for SaaS businesses. For net profit margins, 5-10% is solid when you want to scale, and anything above 15% is spectacular. 

How to Track Net Profit Margin

Knowing how to find net profit margin for your business is the first step toward tracking it.

We strongly recommend choosing a SaaS-focused revenue analytics platform that tracks critical financial metrics in one place.

Baremetrics can help with this. We offer 26 financial metrics that subscription businesses need to accurately track KPIs like net profit margin. Our reports are updated in real-time, providing detailed insights into everything that’s happening with your business’s profit and revenue. 

Unlike many other tools, we don’t use numbers that are running on autopilot. We account for things like paused subscriptions or missed payments (which too many other tools fail to do) so that you have an accurate and actionable look at your finances at all points. 

Learn more about Baremetrics here

How to Improve Net Profit Margin

If you want to improve your net profit margin, you’ll want to follow best practices that will boost your overall revenue and minimize costs.

Some examples include:

  • Scaling up allows you to make “bulk” purchases at discounts, even getting deals on labor or monthly subscription costs. 
  • Reduce the COGS whenever possible; for SaaS businesses, that may include support personnel, software implementation costs, and site operation costs.
  • Cut costs for your business overall by letting employees work remotely to reduce your needed office space (and utilities as a result), or by trimming the fat from a bloated tech stack. 
  • Decrease your customer acquisition costs where possible, focusing on striking the balance between high-quality and high-converting customers and low acquisition costs.
  •  Focus on expanding current customers where the cost of acquisition has already been incurred. A high Net Revenue Retention rate is a sign of a healthy and growing SaaS business.
  • Reduce your churn rate, as it’s cheaper to retain customers than to acquire new ones.  

Final Thought: Choosing An Analytics Tool to Track Net Profit Margin

Accurate data is the only type of actionable data when it comes to financial metrics. SaaS brands need to track multiple financial metrics (including net profit margin) regularly to understand where they stand and what their current growth and scaling potential looks like.

Baremetrics’ financial analytics software has 26 different revenue metrics to help you understand everything that’s happening with your company’s bottom line. 

You want to manage your total expenses effectively. Baremetrics can help. 

Uncover your net profit margin and how it impacts the bottom line. Start your free trial with Baremetrics today. 

FAQ's

  • What factors influence the net profit margin of a SaaS (Software as a Service) company?
    The net profit margin of a SaaS company is influenced by factors such as subscription model efficiency, cost of customer acquisition, operational costs, and pricing strategies.
  • What is the difference between net profit margin and net income margin?
    There is no difference between net profit margin and net income margin; they are terms used interchangeably to describe the percentage of revenue that remains as profit after all expenses are deducted.
  • How can businesses improve their net profit margin ratio?
    Businesses can improve their net profit margin ratio by increasing revenue through higher sales or pricing strategies, reducing operational costs, and optimizing their product or service mix to favor higher-margin offerings.
  • What are some common challenges businesses face when trying to improve their net profit margin?
    Common challenges include high operational and production costs, competitive pricing pressures, changing market demands, and the difficulty of balancing cost-cutting with quality maintenance.
  • How do changes in expenses or revenue impact a company's net profit margin?
    Changes in expenses or revenue directly affect a company's net profit margin; an increase in expenses without a proportional increase in revenue will lower the margin, while an increase in revenue, assuming expenses are controlled, will improve the margin.

Ana Gotter