Like the name suggests, a profit margin is the money you make in your small business after you’ve divided sales by all your costs. Small Business Trends got in touch with some experts in different industries who narrowed down what the numbers might look like for your company.
Michael Philippou has a business blog at My Startup Friend. He narrowed down what a good profit margin should look like in a familiar small business startup.
“I operate in the restaurant industry and can tell you that anything above 10% net margin is considered to be excellent. In reality, most restaurants probably only do 5%,” he writes in an email.
What is a Good Profit Margin?
He goes on give to a good piece of advice about determining your profit margin whether you’re doing your books yourself for turning the numbers over to an accountant.
“ A general “rule of thumb” approach or an industry specific approach. Whichever you use I find most people make the mistake of focusing on “Net Profit Margins” rather than “Gross Profit Margins,” he writes. “ It’s far more important to focus on Gross Profit Margins, because this is what flows into the rest of your accounts. Get it wrong and you will always have a bad Net Margin.”
NYU has put together some other data that include good profit margin numbers in small business industries like computer services ( 25.42%), healthcare products (57.45%) and online retail at 43.76%.
Some of the small businesses that you would expect to do well like a unique gift shop understand the importance of specialization. For example, Karla Singson, owns one of these stores in the Philippines.
“My business has really good margins (50-70%) because it’s a special service,” she writes in an email. “We deliver flowers, teddy bears, and chocolates and we can slap a huge profit on it because of the delivery/ surprise factor.”
She goes on to stress the importance of providing a good shipping service. Some online small businesses have seen their profit margins challenged by the need to compete with the bigger box stores that could offer the service for free. Singson says understanding her target market has enabled her to go around this common issue.
“I know what our clients buy, plus we add the convenience of easy booking and same day delivery, so they are willing to pay what we charge them. I think the secret is to really find out what people pay for instead of what you think you can sell them.
To date, we also offer venue decor for surprises and proposals, engagement rings, and serenades!”
There are some other encouraging profit margin numbers once you break down the retail industry. For example, retailers operating from the grocery space have a profit margin of 22.21 percent. The numbers are even better for other growth industries in the small business space.
For example, there is a 66.93% profit margin for Internet software companies as of January 2018 when some of these NYU numbers were compiled. Although there are big players in the field like Cisco and Microsoft, smaller app developers are continually springing up to get involved with industries that have these levels of profits.
Dave Hermansen responded with a seasoned approach to profit margin that’s outside of the conventional box.
“I have never worried about profit margin. What I am concerned with is the amount of profit per sale. I’d much rather have a 10% profit margin on a product that sells for $3,000 than a 90% profit margin on something that sells for $50. I guarantee you that I’ll have far more money to advertise that 10% profit margin product than the 50% one and still have more money left in my pocket after paying for the ads!”
Understanding Profit Margins in Small Business
Profit margins are a vital metric for assessing the financial health of your small business. It represents the money you retain after dividing your total sales by all your costs. We reached out to experts in various industries to provide insights into what constitutes a good profit margin for different businesses.
Here’s what the experts have to say:
- Michael Philippou, Restaurant Industry: In the restaurant industry, a profit margin above 10% is considered excellent, although most restaurants typically achieve around 5%. Michael emphasizes the importance of focusing on “Gross Profit Margins” rather than “Net Profit Margins” to ensure healthy financial flows in your business.
- NYU Data: NYU offers insights into profit margin numbers for various small business industries. For instance, computer services boast a 25.42% profit margin, healthcare products reach an impressive 57.45%, and online retail maintains a healthy 43.76% profit margin.
- Karla Singson, Unique Gift Shop: Specialized businesses can achieve substantial profit margins, as exemplified by Karla’s gift shop in the Philippines. With margins ranging from 50-70%, she attributes her success to delivering flowers, teddy bears, and chocolates with a surprise factor. She emphasizes the importance of understanding your target market and offering convenience to justify higher prices.
- Retail Industry Breakdown: In the retail sector, specific niches can yield attractive profit margins. Grocery retailers, for example, achieve a 22.21% profit margin. Moreover, growth industries like Internet software companies, as of January 2018, recorded a remarkable 66.93% profit margin.
- Dave Hermansen, Profit Per Sale: Dave provides a unique perspective, focusing on the amount of profit per sale rather than profit margins. He values products with lower profit margins but higher sale prices, as they can generate more income for advertising and leave more money in your pocket after covering expenses.
|Good Profit Margin
|Above 10%, typically 5%
|– In the restaurant industry, a profit margin above 10% is considered excellent, while the average typically hovers around 5%.
– Emphasis on Gross Profit Margins for healthy financial flows.
|Varies by industry
|– NYU provides profit margin data for diverse industries, including computer services, healthcare products, and online retail.
|Unique Gift Shop
|– Specialized businesses like a unique gift shop can achieve high profit margins (50-70%) by offering unique services and leveraging the surprise factor.
|– Dave emphasizes the importance of focusing on profit per sale rather than profit margins, prioritizing higher income potential from products with lower margins.
Enhancing Your Profit Margin Strategy
Experts agree that understanding and optimizing your profit margins is not just about crunching numbers—it’s about strategic business decisions that align with your market, your industry, and your unique business model.
For instance, Michael Philippou’s emphasis on gross profit margins over net profit margins sheds light on the importance of managing your core business operations efficiently before addressing any other financial aspects.
This approach ensures that the foundation of your business is solid, with a healthy flow of funds that can support growth and expansion.
Leveraging Technology for Better Margin Analysis
In today’s digital age, small businesses have an unprecedented advantage in accessing sophisticated analytical tools that were once the preserve of larger corporations. Utilizing software that offers real-time financial analytics can provide deeper insights into your profit margins.
These tools can help you identify not just where you are making or losing money but why. Incorporating technology into your financial analysis allows for more informed decision-making, helping you adjust pricing, reduce costs, or shift strategies as needed to improve your margins.
Diversification as a Profit Margin Strategy
Diversification can also play a crucial role in enhancing profit margins. For small businesses, expanding into new markets or adding complementary products or services can open up additional revenue streams with higher margins.
For example, an online retailer specializing in a niche product might consider offering related accessories or personalized services. This not only increases the average transaction value but can also improve customer retention and satisfaction, contributing to a healthier bottom line.
The Role of Customer Experience in Profit Margins
Karla Singson’s success with her unique gift shop highlights another crucial aspect of profit margins: the value of customer experience.
In an era where consumers are willing to pay a premium for convenience, quality, and personalization, small businesses can leverage this by creating exceptional customer experiences.
Whether through same-day delivery, personalized products, or outstanding customer service, enhancing the customer experience can justify higher price points, thereby improving your profit margins.
Sustainability and Profit Margins
Sustainability practices can also influence profit margins positively. Consumers are increasingly favoring businesses that demonstrate environmental responsibility.
By adopting sustainable practices, such as sourcing eco-friendly materials or minimizing waste, businesses can not only reduce costs in the long run but also attract a loyal customer base willing to pay a premium for sustainable products.
This alignment of values can be a differentiator in crowded markets, potentially leading to higher profit margins.
Frequently Asked Questions
What Is a Profit Margin?
A profit margin is a financial metric that reveals the percentage of profit your small business retains after deducting all costs from your total sales. It’s a vital indicator of financial health.
How Do I Determine a Good Profit Margin for My Small Business?
The ideal profit margin varies by industry and business model. To assess what’s good for your business, consider seeking guidance from experts in your field or analyzing industry-specific data.
What Insights Can I Gain from Industry Experts?
Industry experts like Michael Philippou provide valuable insights into what constitutes a good profit margin. For instance, in the restaurant industry, a net margin above 10% is considered excellent.
Why Should I Focus on Gross Profit Margins?
Michael Philippou recommends focusing on Gross Profit Margins as they influence the health of your overall financial accounts. Understanding Gross Profit Margins can prevent unfavorable Net Profit Margins.
What Do NYU’s Profit Margin Data Reveal?
NYU offers data on profit margins across various small business industries. For example, computer services boast a 25.42% profit margin, while healthcare products reach an impressive 57.45%.
How Can Specialization Impact Profit Margins?
Specialized businesses, like Karla Singson’s unique gift shop, can achieve high profit margins (50-70%) by offering distinct services or products with a surprise factor.
What Strategies Can Improve Profit Margins in Retail?
In the retail sector, niche markets can yield attractive profit margins. For instance, grocery retailers achieve a 22.21% profit margin, and Internet software companies, as of January 2018, recorded a remarkable 66.93% profit margin.
Why Should I Consider Profit per Sale?
Dave Hermansen offers an unconventional perspective, emphasizing the importance of profit per sale rather than profit margins. This approach prioritizes higher income potential from products with lower margins.
How Can I Use Profit Margins to Enhance My Business Strategy?
Understanding profit margins empowers you to make informed decisions about pricing, expenses, and growth strategies. It’s a crucial metric for achieving financial success in your small business.
Where Can I Find More Insights on Profitable Small Businesses?
Explore our related articles, such as “20 of the Most Profitable Small Businesses,” to discover additional tips and insights for optimizing profitability in your business.
Conclusion: Mastering Profit Margin for Small Business Success
Navigating the complex landscape of small business profitability requires a nuanced understanding of profit margins.
The insights from industry experts like Michael Philippou, Karla Singson, and Dave Hermansen provide a multifaceted view on achieving financial health and growth. Here’s a concise blend of their wisdom and strategic advice for small business owners:
- Michael Philippou emphasizes the critical importance of focusing on gross profit margins, suggesting that a solid understanding and management of these figures are foundational to overall business success.
- Karla Singson showcases how specialization and understanding customer needs can lead to exceptional profit margins. Her approach underlines the importance of adding value through customer experience.
- Dave Hermansen offers a unique angle, prioritizing profit per sale over profit margin percentages, highlighting the significance of each transaction’s contribution to overall profitability.
Strategic Insights for Growth:
- Industry-Specific Benchmarks: Utilize data, like the profit margin insights from NYU, to understand where your business stands within your industry and identify areas for improvement.
- Leveraging Technology: Adopt analytical tools for better financial insights, enabling strategic adjustments in pricing, cost management, and operational efficiencies.
- Diversification: Consider expanding your product or service offerings to tap into new revenue streams, enhancing both profit margins and market resilience.
- Customer Experience: Enhance the buying experience to justify premium pricing and foster customer loyalty, directly impacting profitability.
- Sustainability Practices: Implementing eco-friendly practices can attract a broader customer base and potentially lower operational costs over time.
- Understanding and optimizing profit margins is not merely about financial management but involves strategic business decisions that resonate with market demands and consumer expectations.
- A holistic approach, incorporating both expert advice and innovative strategies, is essential for steering your small business toward sustainable growth and profitability.
- Profit margins serve as a key indicator of your business’s health, guiding decisions on pricing, expenses, and strategic direction.
By integrating these insights and strategies, small business owners can enhance their approach to profit margins, ensuring a path to financial success and long-term viability in a competitive marketplace.
|Insights from Experts
|Profit Margin Strategies
|Understanding Profit Margins
|– Profit margins are vital indicators of financial health.
– They guide decisions toward profitability and growth.
|– No universal “good” margin; varies by industry and strategy.
|– Profit margins empower informed decision-making.
|Insights from Industry Experts
|– Michael Philippou: In the restaurant industry, >10% net margin is excellent.
– Focus on Gross Profit Margins.
|– NYU’s industry-specific data provides benchmarks.
– Specialization can lead to exceptional margins.
|– Profit per sale can outweigh high margins.
|Exploring NYU’s Profit Margin Data
|– NYU data spans diverse industries, highlighting potential for profitability.
– Computer services, healthcare products, online retail, and more.
|– Industry-specific benchmarks inform strategies.
|– Niche markets offer attractive profitability.
|Specialization and Target Market Understanding
|– Karla Singson’s unique gift shop boasts 50-70% margins.
– Specialized services can justify higher prices.
|– Understanding customer needs and preferences is key.
– Convenience adds value and supports pricing.
|– The “secret” lies in knowing what customers truly value.
|The Power of Profit per Sale
|– Dave Hermansen prioritizes profit per sale over margins.
– High-value products can yield greater advertising and income.
|– Consider profit per sale in pricing and product offerings.
|– Nuanced strategies cater to unique business circumstances.
Read more: 20 of the Most Profitable Small Businesses
Source: Small Business Trends