What Is a Reasonable Profit Margin for a Small Business? (And How to Improve Yours)
Image by Tem Rysh
When I first started making money on the side — late nights freelancing after the family went to bed — I felt proud seeing those payments hit my account.
But when I finally did the math on what I was actually keeping, it was kind of depressing.
Between taxes, fees, and software I forgot I was even paying for, my "profit" was embarrassingly low.
That’s when I learned this hard truth: revenue is what you make, but profit is what you keep.
And if you’re a parent running a business or side hustle, keeping more of what you earn is key to buying groceries and building wealth.
So let’s break it down — what’s a reasonable profit margin for a small business, and more importantly, how can you improve yours?
What Is Profit Margin, Exactly?
Before we talk about what a "good" margin looks like, let’s define the basics.
Revenue: All the money your business brings in.
Expenses: Everything it costs to run your business (tools, products, advertising, rent, etc.).
Profit: What’s left over after expenses.
Your profit margin is the percentage of your revenue that turns into profit.
There are two key types:
Gross profit margin = (Revenue – Cost of Goods Sold) / Revenue
Net profit margin = (Revenue – All Expenses) / Revenue
Here’s a simple example: Let’s say you run a business that brings in $5,000/month.
Your cost of goods (or direct expenses) are $2,000.
You have another $1,500 in other expenses (marketing, software, etc.)
That leaves $1,500 in profit.
Your gross profit margin = ($5,000 – $2,000) / $5,000 = 60%
Your net profit margin = ($5,000 – $3,500) / $5,000 = 30%
That 30% net profit is what you actually keep — and that’s the number we care about.
So What’s Considered a “Reasonable” Profit Margin?
There’s no single number that fits every business — but there are some helpful benchmarks to guide you.
In general, here’s how small business profit margins are often categorized:
Below 5%: Struggling — this usually means you’re barely covering costs or reinvesting so heavily that you’re not paying yourself. It’s hard to sustain long term.
5%–10%: Average — this is typical for many small businesses, especially those in competitive or high-overhead industries.
10%–20%: Healthy — you’re running efficiently, pricing fairly, and keeping a good portion of your revenue.
20%+: Thriving — these margins usually come from optimized operations, premium pricing, or low overhead.
Of course, this varies widely depending on your business type:
Retail (especially brick-and-mortar) typically runs on tight margins — often 2% to 8%.
Restaurants and food businesses also tend to be low-margin, with averages between 3% and 10%.
Online businesses like digital products or ecommerce dropshipping might see 10%–30%, depending on ad spend and fulfillment costs.
Service-based businesses (coaching, freelancing, consulting) often have the highest margins — 20%, 30%, even 50% or more — especially if you’re a solo operator.
The key is to understand what’s normal for your industry, but also to set a margin goal that supports your lifestyle.
If you’re a parent running a business to create more time or flexibility, a 20% profit margin might not just be healthy — it might be essential to cover taxes, childcare, or the occasional takeout night when life gets hectic.
And remember: revenue is vanity, profit is sanity.
It’s better to run a $50K business with 40% margins than a $200K business that barely breaks even.
Common Profit Margin Killers (And How to Avoid Them)
There are a few sneaky culprits that can eat away at your profit margin without you even noticing — especially when you’re juggling a million things at once.
The first is underpricing. If you’re charging just enough to cover your costs (or worse, not even that), you’re setting yourself up for stress and burnout. It’s easy to fall into this trap when you’re just starting out or feel pressure to stay competitive, but if your pricing doesn’t account for your time, taxes, and the value you bring, it’s time to rework your rates.
Another big one is expense creep. That $12/month software you signed up for “just to try,” the multiple design or marketing subscriptions, or the upgraded Zoom plan — they all add up. These small recurring charges can quietly drain your cash flow. Take time each quarter to audit your tools and subscriptions, cancel what you don’t use, and look for cheaper alternatives.
Then there are the time-sucking clients or projects that simply aren’t worth it. If something consistently drains your energy, takes up too many hours, or comes with a ton of back-and-forth for very little return, it’s not just killing your margin — it’s hurting your overall business health. Be picky about where you spend your time.
Finally, if you’re not tracking your numbers regularly, you’re essentially flying blind. Many small business owners wait until tax season to look at their books, but if you want to protect your profit margin, you need to check in monthly. Knowing what’s coming in and going out — and making decisions based on that data — is where you gain control.
How to Improve Your Small Business Profit Margin
If your margin is low, here are a few ways to improve it without burning out:
Raise your prices: Especially if you haven’t adjusted them in the past year. Costs rise, your experience grows, and your time becomes more valuable — your rates should reflect that. Even a modest 10% price increase across your offerings can create meaningful growth in your bottom line.
Cut unnecessary expenses: Go through your bank statements and cancel any recurring tools, subscriptions, or software you haven’t used in the past 30 days. You don’t need the premium version of everything — downgrade where possible, and only keep what’s actively helping your business grow.
Streamline your operations: Look for opportunities to save time through automation (like email responders or invoicing tools), use templates for repeat tasks, and group similar tasks together in time blocks. The less manual and scattered your workflow, the more profit you can keep without working longer hours.
Focus on high-margin products or services: Not everything you offer is equally profitable. Identify your best performers — the ones that require minimal effort but deliver maximum return — and make those the centerpiece of your business. Consider cutting or reworking lower-margin offers that take too much time or have high costs.
Track your numbers monthly: Don’t wait until tax season. Use a simple spreadsheet or tool like Wave, QuickBooks, or Notion to monitor what’s coming in and going out. This visibility lets you catch problems early and double down on what’s working.
If you’re a parent running a business, your time and energy are precious. Protecting your profit margin isn’t just about numbers — it’s about creating more freedom and financial stability for your family.
How Profit Margin Fits Into the Bigger Picture
Profit margin isn’t just a business metric — it’s a quality-of-life metric.
A healthy margin means you can:
Pay yourself consistently
Save for emergencies or taxes
Reinvest in your business
Work fewer hours without losing momentum
Whether you’re using your business income to pay off debt, fund a house downpayment, or build generational wealth — a solid profit margin is what makes it sustainable.
Frequently Asked Questions About Small Business Profit Margins
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Service-based businesses tend to have higher profit margins since they don’t require inventory or manufacturing.
A healthy net profit margin for a solo service provider (like a freelancer or consultant) is typically between 20% and 50%.
If you’re outsourcing work or have a team, aim for at least 15–25%.
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Online businesses vary widely depending on your model.
If you sell digital products, margins can be 50% or higher due to low overhead.
For eCommerce, 10%–30% is more typical — especially once you factor in shipping, fulfillment, and advertising costs.
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It depends.
Some high-volume businesses (like retail or food) survive on thin margins, but it requires tight cost control and consistent cash flow.
For most small businesses — especially those run by parents with limited time — higher margins are crucial for sustainability.
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Start with your total revenue. Subtract your total expenses.
Divide the result by your total revenue and multiply by 100. That’s your net profit margin.
For example: If you made $10,000 and spent $7,500, your margin is 25%.
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Both matter, but margin tells you more about sustainability.
You can make $100K in revenue and still be broke if your expenses are too high.
A healthy profit margin means your business is actually working — not just looking good on paper.
Build a Business That Works for You
There’s no one-size-fits-all number — but aiming for a healthy, consistent profit margin is one of the best ways to build a business that supports your family and your future.
Start by tracking your numbers.
Set a goal.
Adjust as you go.
You don’t need to be the biggest business on the block — just one that actually makes money and gives you your time back.
And if you’re looking for more practical, parent-friendly advice on running a business or side hustle?
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