What is Margin?

Margin is the difference between revenue and the associated cost of sales. This is an essential financial analysis concept, since margins must be maintained or increased in order to generate a profit. There are several variations on the concept, which are noted below. These margins are closely followed by managers and investors, since even a small decline in any of them can be a precursor to ongoing losses. The margin types are as follows:

Gross margin. Gross margin is revenues minus both the fixed and variable components of the cost of goods sold. It indicates the effect of changes in pricing, sales allowances and returns, and product costs. This tends to be the strongest indicator of overall company profitability.
Contribution margin. Contribution margin is revenues minus all variable expenses. It shows the amount of profit left to pay for all fixed expenses, such as rent. This margin is usually not shown on a company’s income statement.
Operating margin. Operating margin is revenues minus the cost of goods sold and all operating expenses. It shows the profit generated by the core operating activities of a business.
Profit margin. Profit margin is revenues minus all expenses, including financing and non-recurring expenses. It shows the entire profit-making ability of a business, including both operating and non-operating activities.