Margin
Margin is how much value a business captures per franc of revenue --- the distance between what comes in and what it costs to make that happen.
What is it?
Margin measures profitability as a percentage of revenue. Revenue tells you how much money flows in. Margin tells you how much of it sticks.1
Three margins, each telling a different story:
| Margin | Formula | What it reveals |
|---|---|---|
| Gross margin | (Revenue − COGS) / Revenue | Is the product itself profitable? |
| Operating margin | (Revenue − COGS − Operating costs) / Revenue | Is the business profitable after running costs? |
| Net margin | Net profit / Revenue | How much actually reaches the bottom line? |
A company with CHF 500K revenue, CHF 200K cost of goods, CHF 220K operating costs, CHF 15K interest, and CHF 16K tax has: gross margin 60%, operating margin 16%, net margin 9.8%.
Each margin peels back a layer. High gross margin with low operating margin means the product is profitable but the business is expensive to run. High operating margin with low net margin means debt or taxes are consuming the value.
In plain terms
Revenue is the size of the pie. Margin is the slice you keep. A large pie with thin margins can be worse than a small pie with thick ones.
How does it work?
1. Margin as business DNA
Different industries have structurally different margins:
| Business type | Typical gross margin |
|---|---|
| Software/SaaS | 70-85% |
| Consulting/services | 50-70% |
| Retail | 25-50% |
| Manufacturing | 20-40% |
| Restaurants | 60-70% (but low operating margin) |
These are not good or bad --- they are structural. A restaurant with 65% gross margin and 5% net margin is healthy for its industry. A software company with 65% gross margin is underperforming.
2. Margin improvement levers
Two ways to improve margin: increase revenue per unit (pricing power, upselling) or decrease cost per unit (efficiency, scale, automation). The structural path is more interesting: migrating from low-margin to high-margin revenue models. Moving from consulting (sell time, variable costs scale linearly) to digital products (create once, near-zero marginal cost) is a margin architecture change.
3. Your ventures through the margin lens
- Workshop (CHF 50/attendee × 20 attendees = CHF 1,000, costs ~CHF 400): gross margin ~60%, but limited by seats and time
- Training programme (CHF 2,000/participant × 15 participants): gross margin 50-70%, higher per-unit revenue
- Digital platform (CHF 20/month × 500 subscribers): gross margin 80-90%, scales without your time
The progression is clear: each model captures a larger percentage of revenue as margin, while requiring less of your time per franc earned.
Check your understanding
Five questions (click to expand)
- Calculate the three margins for a business with CHF 200K revenue, CHF 60K COGS, CHF 80K operating costs, CHF 10K interest, CHF 10K tax.
- Explain why a restaurant can have a 65% gross margin and still barely survive. Which cost layer is the problem?
- Compare the margin structure of consulting vs software. Why does this difference affect valuation?
- Connect margin to revenue-model. How does switching from transaction to subscription change margin dynamics?
- Design a margin improvement strategy for a training business that currently depends on in-person delivery.
Where this concept fits
Where this concept fits
graph TD RM[Revenue Model] --> MG[Margin] CS[Cost Structure] --> MG MG --> ROI[Return on Investment] MG --> VA[Valuation] MG --> BE[Break-Even] MG --> VCC[Value Creation vs Capture] style MG fill:#4a9ede,color:#fff
Sources
Footnotes
-
Penman, S. H. (2013). Financial Statement Analysis and Security Valuation. Chapter 9 on profitability analysis and margin decomposition. ↩