What is a good gross profit margin in NZ, and what if yours is below it?

A good gross profit margin in New Zealand is one that sits inside the range for your trade and still leaves enough after direct costs to pay your overheads and tax. Professional services often run at 50% to 70%, trades at 25% to 45%, hospitality at 25% to 40% and grocery-style retail at 20% to 30%. Below the range for your industry, something is wrong with price, direct costs or both.

Most owners have never been told their number, let alone whether it’s good. This feature shows how to calculate it so it’s comparable, what to compare it with, and what to do when it comes up short.

How do you calculate gross profit margin properly?

The formula is simple:

Gross margin % = (sales − cost of sales) ÷ sales × 100

The traps are in what you put into each side.

• Work excluding GST. Sales of $11,500 including GST is $10,000 of sales. If your accounting software reports GST-exclusive figures (most do), use those. A margin worked out on GST-inclusive sales against GST-exclusive costs will look better than it is.
• Use net sales. Take off discounts, refunds and write-offs.
• Put direct costs in cost of sales. That means materials, stock, packaging, freight in, subcontractors and, for service and trades businesses, the wages of the people who do the work. Xero’s guidance is that cost of sales for a service business includes “direct labour for service delivery”, and that rent, marketing and office salaries stay out.
• Keep it consistent. Whatever you decide, do it the same way every month, or your trend line means nothing.

Gross margin is not markup. A 50% markup is a 33% margin. If the two are blurred in your head, read our margin vs markup page first.

Why does the wages question matter so much?

Because it’s the single biggest reason two owners in the same trade quote different “margins”. Take a made-up Hamilton plumbing business, on GST-exclusive figures for the year:

	Wages counted as direct	Wages left in overheads
Sales	$600,000	$600,000
Materials	$180,000	$180,000
Subcontractors	$60,000	$60,000
Field staff wages	$190,000	not counted
Cost of sales	$430,000	$240,000
Gross profit	$170,000	$360,000
Gross margin	28%	60%

This is an illustrative example, not a real business.

Same business, same year, a 32-point gap. The 60% version feels comfortable and it’s the one that leads owners to underprice. The 28% version is the honest one for a trade, because the field staff are the product. It’s also the one comparable with benchmarks for trades.

What’s a good gross margin by industry?

Xero’s NZ guide gives indicative ranges for small businesses. They’re ranges, not rules, and they assume direct wages are in cost of sales for service businesses:

Industry	Indicative gross margin
Professional services (accounting, legal, consulting)	50% to 70%
Software and digital services	60% to 80%
General retail	30% to 50%
Construction and trades	25% to 45%
Hospitality and food service	25% to 40%
Grocery and food retail	20% to 30%

Two cautions. First, these are guides from a software company, not official statistics, so treat them as a sanity check. Second, a business can sit outside its range for good reasons: a high-volume wholesaler lives on a low margin, a boutique on a high one.

Where do you find a proper benchmark for your trade?

Use Stats NZ’s business performance benchmarker. It publishes ratios built from Annual Enterprise Survey data and Inland Revenue tax data, and it defines the gross profit ratio as gross profit divided by sales and/or services. The useful part is that it shows the median plus the 25th and 75th percentiles, split into four turnover bands. According to the Figure.NZ copy of the 2024 dataset, 231 of the 483 industries it covers have enough businesses to publish reliable ratios.

How to read it:

1. Find your industry, then your turnover band. A $400,000 business shouldn’t be compared with a $10 million one.
2. Look at the median, then the 25th percentile. Below the 25th percentile, three-quarters of similar businesses are doing better than you.
3. Check how the survey treats wages. The ratio can be computed differently from how your accounts show cost of sales, so confirm with your accountant that you’re comparing like with like.

If your industry doesn’t have enough businesses to publish, your accountant can usually give you a comparison from their other clients in the same trade, anonymised.

How much margin do you actually need?

Benchmarks tell you where others sit. What matters for your business is the margin that covers its own overheads. Work backwards:

Required gross margin = (overheads + the profit you want) ÷ sales

Say the Hamilton plumbing business has overheads (office wages, vehicles, insurance, rent) of $140,000 and wants $60,000 profit before tax and owner’s pay. It needs $200,000 of gross profit from $600,000 of sales, a 33% margin. It’s making 28%. That’s a $30,000 annual hole, which is exactly the kind of gap break-even maths shows, and the kind that gets plugged with an overdraft until it can’t be.

What do you do if your gross margin is too low?

There are only three levers. Pull them in this order.

1. Price. It’s the fastest, and it flows straight through to profit because costs don’t change. To hit a target margin, use:

Price = cost ÷ (1 − target margin)

In our example, costs are $430,000 and the target is 33%. $430,000 ÷ 0.67 is about $641,800, a price rise of roughly 7% across the board. If you can’t lift everything by that much, start with the jobs where you’re busiest or where you’re clearly cheapest. Our guide on putting prices up covers how to tell customers, and the price rise calculator shows how many customers you can lose before a rise stops paying.

2. Direct costs. Re-quote your top five supplier lines. Check wastage and rework, since a call-back for a faulty job costs a second visit and earns nothing. Look at how long jobs take against how long you quoted. For hospitality and retail, look at stock loss and portion sizes. Supplier terms matter here too, because settlement discounts and volume rebates come straight off cost of sales.

3. Mix. Not every line earns the same. If one service runs at 45% and another at 15%, sell more of the first or reprice the second. Many owners find that their busiest line is their least profitable one, because it’s the cheapest.

Do this by product or job type if your software allows, not just in total. A blended 28% can hide a 45% and a 10%.

Why is a thin margin also a cash problem?

Because costs are paid before customers are. Say you add $100,000 of sales at 28% gross margin. The cost of sales on that is $72,000. If customers pay, on average, about 45 days after you’ve bought materials and paid wages (common on 20th-of-the-month terms), you’re carrying roughly 45 days of those costs: about $8,900 sitting out in the field at any time. On a fat margin, the extra profit makes that painless. On a thin one, $28,000 of extra gross profit may be eaten by overheads that grew to support the work, leaving little to fund the next job.

That’s the mechanism behind why growth eats cash, and a thin margin makes it worse. The practical rules:

• Don’t chase volume until you know the margin on that work.
• Build the extra working capital into your cash flow forecast before you say yes to a big contract.
• Watch margin monthly, as part of the monthly numbers check. A margin slipping 2 points over three months is far cheaper to fix than one discovered at year-end.

When does funding make sense?

Funding doesn’t fix a margin. If the business loses money on every job, more cash only delays the reckoning. But it can bridge a business that’s healthy on paper and short on timing: a good contract with a thin first-year margin, stock bought in bulk to lower unit cost, or a pricing reset that will take a couple of quarters to flow through while costs are already out the door.

If that’s you, it’s worth finding out what’s available. See what you could qualify for in about a minute.

Know your number, then decide what it needs

Most Kiwi owners get through a year without once working out their gross margin, then wonder in March why the accounts disagree with their gut. Doing the sum properly, once, is the useful bit. If the answer is a pleasant surprise, you’ve got room to invest. If it’s a shock, you’ve found the problem while there’s still time to fix it.

And if the fix needs some breathing space (a big job to fund, stock to buy up front, or a few months of cash while a price rise beds in), that’s what we’re here for. We work with New Zealand owners on unsecured and cash-flow funding, typically $5,000 to $500,000 and sized on turnover and bank statements, and property-secured lending from $20,000 to $5,000,000.

Asking takes about 60 seconds, and your credit file isn’t touched just for enquiring. We don’t send your details to a pile of lenders, so there’s no flood of calls afterwards. A real person reads what you’ve written and rings you to talk it through. Please fill in the form accurately, including your turnover and what the money is for, so we can point you at the right option the first time.

Check where you stand →