When Growth Feels Real — But Profit Doesn’t: Understanding Operating Margin

Growth is visible. Profit takes structure.

“We’re doing more than ever. Bigger team, bigger clients, bigger revenue. So why does profit still feel flat?”

It’s a common moment — founders start hitting visible milestones, revenue keeps climbing, and yet the pressure doesn’t ease. In fact, things feel tighter. The team is busier. Monthly stress levels aren’t dropping. And despite all that progress, the business doesn’t feel more profitable.

That disconnect often comes down to Operating Margin — a metric that quietly shows whether your infrastructure is scaling with you or weighing you down.

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What Is Operating Margin?

At its core, Operating Margin measures how efficiently your business turns revenue into profit — after covering all operating costs but before interest and taxes.

It's the part of profit that reflects actual business operations. Not raw production or delivery costs — that’s Gross Margin. And not Net Income either, which includes interest, taxes, and other non-operating items that don't reflect core business performance.

Operating Margin sits in the middle and tells you whether your business model scales beyond just sales. It answers a different question than Gross Margin: not whether you can deliver profitably, but whether you can run the business profitably.

Operating Margin Formula

Operating Margin (%) = (Recognized Revenue – COGS - OpEx) ÷ Recognized Revenue

• COGS (Cost of Goods Sold): Any cost tied directly to the delivery of your product or service

• OpEx (Operating Expenses): Any operating cost not tied directly to the delivery of your product or service

  
  

Note: Operating Margin is typically calculated using accrual-based financials. If you use a cash-based system internally, your operating results may differ.

How to Read Operating Margin Benchmarks

What counts as a “good” operating margin depends heavily on your industry and how infrastructure scales with revenue. Below are typical ranges for four common models:

SaaS (Software-as-a-Service)

• Strong: > 30%

• Okay: 20%–30%

• Weak: Below 20%

SaaS companies often operate with high gross margins, but operating margins depend on how lean the business runs. Strong performers scale revenue faster than team or tech stack growth. Anything above 30% suggests optimized ops and efficient burn discipline. Below 20% can signal bloated OpEx, inefficient sales spend, or early-stage losses.

Hospitality (Boutique & Seasonal Lodging)

• Strong: ≥ 15%

• Okay: 13%–14.9%

• Weak: Below 13%

Labor-heavy and seasonal by nature, hospitality operating margins rely heavily on occupancy rates, pricing strategy, and tightly managed overhead. Boutique hotels with lean staffing models or strong ADR (average daily rate) typically outperform. Margins under 13% often reflect underutilization, seasonal volatility, or staffing-heavy models.

Service-Based (Agencies, Consultants, Contractors)

• Strong: > 12%

• Okay: 8%–12%

• Weak: Below 8%

In service models, margin strength comes from high billability and lean admin layers. Firms that tightly manage delivery scope and founder role transitions typically maintain strong operating margins. Dropping below 8% often means over-hiring, underbilling, or pricing mismatches.

Product-Based (Direct to Client, E-commerce, Manufacturing)

• Strong: > 10%

• Okay: 7%–10%

• Weak: Below 7%

Physical products carry significant OpEx — warehousing, packaging, fulfillment, and customer service. Margins above 10% suggest strong throughput or cost control. Below 7% often reflects scale friction, excess inventory holding costs, or bloated logistics spend.

Operating Margin doesn’t need to be massive — especially in early stages — but it does need to reflect some leverage over time. If revenue doubles and margin shrinks, something under the hood is off.

Why It Matters

Operating Margin tells you how much actual profit you keep after funding your operations. It’s often the first metric to break when:

• Team size grows faster than efficiency

• Overhead costs creep up during expansion

• Founders get out of the day-to-day and start replacing themselves in operations

Even if your Gross Margin holds steady, your Operating Margin can quietly erode if you’re adding layers of cost faster than the margin scales.

What’s Included

• Revenue

• Cost of Goods Sold (COGS)

• Operating Expenses (OpEx)

• Depreciation / Amortization (from both OpEx and COGS, if applicable)

Note: Operating Margin can be presented with or without depreciation & amortization, depending on context. Some firms use EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization) margin for comparisons.

What’s Not Included

• Debt service (loan payments, interest)

• Taxes

• One-time gains or losses

• Other Income / Expenses

Strengths

• Captures the full cost of operations (not just COGS)

• Useful for comparing operational efficiency across periods

• Helps separate real business performance from financing or tax strategies

  
  

Limitations / Common Pitfalls

• Founders often confuse it with Gross Margin or EBITDA

• Can look artificially low if founder comp is high (and not normalized)

• Doesn’t show cash — only accrual-based profitability

• Can be skewed by one-time OpEx spikes (e.g., legal, hiring, rebrand)

  
  

When to Use It

• Evaluating operational health

• Assessing team efficiency as you scale

• Planning fundraising or storytelling

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Operating Margin isn’t about how good your product is — it’s about how good your company is at being a business. It reveals whether your operations are built to support growth… or just survive it.

Gross Margin shows how efficiently you deliver. Operating Margin shows how efficiently you run the business — and when that line slips, it’s a sign that scale might be outpacing structure.

And if your margin is thin, that doesn’t always mean something’s broken — it might just mean your next move needs to be smarter, not louder.