Margins and operating leverage
How profitability scales — and why margins move.
Margins and operating leverage
| Concept | Explanation | |---|---| | Gross margin | Gross profit divided by revenue. | | Operating margin | Operating income divided by revenue. | | Net margin | Net income divided by revenue. | | Contribution margin | Revenue minus variable costs associated with the incremental unit or customer. | | Operating leverage | Profit changes faster than revenue because fixed costs are spread over more or fewer units. | | Margin expansion | A larger percentage of revenue remains after costs. |
Improving margins may reflect scale, pricing power, product mix, or temporary cost restraint. Deteriorating margins may signal competition, inflation, or heavy investment.