What is operating margin?
Operating margin is operating income as a percentage of revenue. It shows how much of each revenue dollar is left after the costs of running the business, before interest and taxes.
It isolates the operations themselves. Because it sits above financing and tax effects, it is a clean read on whether the core business model makes money.
The operating margin formula.
Operating margin = (operating income divided by revenue) times 100. Operating income is revenue minus operating expenses, which include cost of goods sold and operating costs.
This tool calculates it directly or from revenue and operating expenses. Either way, the result is the share of revenue that operations convert into profit.
A worked example.
A business earns 100,000 in revenue with 80,000 in operating expenses, leaving 20,000 in operating income. Operating margin is 20,000 divided by 100,000, times 100, which is 20%.
What is a good operating margin?
15% and up is healthy for an established business, signaling clearly profitable operations. Many growing SaaS companies run lower or even negative while they invest in growth, which can be appropriate if the path to positive margin is clear.
Operating margin and EBITDA describe profitability from slightly different angles. Reading it next to the burn behind the margin shows how efficiently any losses are being spent.
How to improve it.
Grow revenue faster than operating costs, or take cost out of operations. Both the cost of acquiring customers and the cost of serving them feed directly into the margin.
Acquisition is one of the larger operating costs in SaaS, so shifting it toward channels that compound helps the margin over time. That is the case for working on the cost side of the margin.