Quick Answer: A good net profit margin for small businesses typically ranges from 5-10%. IRS data shows sole proprietorships average 21%, but that includes low-overhead consulting. Restaurant margins average 2.8-4%; salons average 10%+. Know your industry benchmark to set realistic pricing, staffing, and growth goals.
How Do Profit Margins Vary by Industry?
"Good" depends entirely on what type of business you run.
- Restaurants operate on razor-thin margins. According to the National Restaurant Association, full-service restaurants average just 2.8% net profit, while quick-service hits around 4%. You're paying servers, line cooks, and hosts while managing perishable inventory and prime real estate costs.
- Retail businesses typically see 2–6% net margins. According to RMA Annual Statement Studies, most retailers operate at 2–6% net profit. Labor (10–20% of revenue) and overhead are the primary pressure points.
- Service businesses fare better. Salon margins average 10–20% net profit, while landscaping crews typically hit 10–14%. Cleaning operations can exceed 31%. These businesses have lower product costs.
If you're a restaurant owner comparing yourself to that 21% IRS average, stop. That figure includes professional services with minimal overhead. Your 5% margin is actually excellent for restaurants.
What Affects Your Profit Margin Most?
Labor costs are your biggest lever. For restaurants and service businesses with hourly teams, labor eats up 30–37% of revenue.
According to the National Restaurant Association, profitable full-service restaurants keep labor at 34.2% of sales. Unprofitable ones hit 42.9%. That 8.7-point difference determines success or failure. Tracking your labor costs in real time helps you stay on the profitable side.
Your gross margin reveals pricing problems. This measures what's left after paying for direct costs like food or supplies. Formula: (Revenue − Cost of Goods Sold) ÷ Revenue. If your restaurant brings in $50,000 but spends $18,000 on food and kitchen labor, your gross margin is 64%. For restaurants, food costs should stay at 28–35% of revenue.
Control overhead to protect net margin. Strong gross margin but weak net margin? Your overhead is too high. Track what remains after paying rent, utilities, manager salaries, and marketing.
What Can You Do to Improve Your Margins?
Knowing your margins is one thing—improving them is another. Here's where to focus your energy.
- Optimize scheduling to match demand. Track sales per labor hour and schedule your hourly teams based on actual traffic patterns. According to the Small Business Administration, cross-training so one person can cover multiple roles during slow periods is one of the most effective ways to reduce labor costs.
- Control inventory and supply costs. Use FIFO rotation to reduce spoilage, track high-cost items daily, and negotiate with suppliers. Improving your gross margin starts with tighter inventory control.
- Review pricing against true costs. Many owners underestimate overhead when setting prices. Calculate what each service actually costs, including allocated labor and rent, then price accordingly.
How Does Homebase Help with Labor Cost Management?
Labor costs eat into margins faster than anything for restaurants, salons, and service businesses. Homebase helps you control them with a time clock that prevents buddy punching, scheduling tools that show labor costs in real time, and timesheets that track payroll dollars.
When you see labor costs before they become problems, you make better decisions about staffing, pricing, and growth.
Get Homebase free for six months.
Sources and Methodology
At Homebase, we rely on up-to-date, authoritative sources to ensure every Question Center article provides accurate guidance for small business owners. We start with primary federal materials from the IRS and Department of Labor, verify details using official agency publications, and use reputable industry resources only to supplement—never replace—official law.
For this piece, we referenced IRS Statistics of Income data on sole proprietorship profit margins, Small Business Administration guidance on employee management and cross-training, National Restaurant Association's 2024 analysis of labor costs and restaurant profitability, International Spa Association's 2025 US Spa Industry Study, Association of Residential Cleaning Services International benchmarking data, Risk Management Association Annual Statement Studies for retail industry benchmarks, IBISWorld industry-specific profitability studies for landscaping services, and U.S. Foods guidance on food cost percentage management. We also reviewed Department of Labor wage and hour data to understand labor cost impacts across service industries.