Operating Margin

What is Operating Margin?

Operating margin is the percentage of revenue that remains after paying all operating costs, both direct (COGS) and indirect (operating expenses like sales, marketing, R&D, and G&A). It shows how efficiently you convert revenue into operating profit.

Operating margin differs from gross margin by including operating expenses. A company can have great gross margins but poor operating margins if overhead is too high.

Why Operating Margin Matters

Operating margin reveals the true efficiency of your business model. It includes all the costs of running the business, not just delivering the product. A profitable operating margin means your business works at current scale.

Investors use operating margin to assess business quality. Consistently positive operating margins indicate a sustainable model. Negative margins require either growth to reach scale or fundamental changes.

Operating Margin Benchmarks

Best-in-class SaaS companies achieve 20-30% operating margins at scale. Early-stage companies often run negative margins while investing in growth. The Rule of 40 allows trading margin for growth.

Quarterly results:

• Revenue: $2,000,000
• COGS: $400,000
• Gross profit: $1,600,000
• Operating expenses: $1,200,000
• Operating income: $400,000

Operating Margin = $400K ÷ $2M = 20%

You keep $0.20 of every revenue dollar after all operating costs.