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.
|Expert||Industry||Good Profit Margin||Key Insights|
|Michael Philippou||Restaurant Industry||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.
|NYU Data||Various Industries||Varies by industry||- NYU provides profit margin data for diverse industries, including computer services, healthcare products, and online retail.|
|Karla Singson||Unique Gift Shop||50-70%||- Specialized businesses like a unique gift shop can achieve high profit margins (50-70%) by offering unique services and leveraging the surprise factor.|
|Dave Hermansen||Varied Perspective||Varies||- Dave emphasizes the importance of focusing on profit per sale rather than profit margins, prioritizing higher income potential from products with lower 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: Profiting from Profit Margins in Small Business
In the ever-evolving landscape of small businesses, understanding profit margins is akin to wielding a compass in uncharted territory. This essential financial metric reveals the health and viability of your business, guiding your decisions toward profitability and growth.
Through insights from industry experts like Michael Philippou, Karla Singson, and Dave Hermansen, we’ve unraveled the complexities of profit margins. Whether you’re in the restaurant industry, running a unique gift shop, or exploring niche markets, there’s no one-size-fits-all answer to what constitutes a “good” profit margin. It varies by industry, business model, and strategy.
Our exploration of NYU’s profit margin data showcased the vast spectrum of possibilities, from computer services to healthcare products and online retail. These figures underscore the importance of industry-specific benchmarks while highlighting the potential for exceptional profitability in specialized sectors.
Karla Singson’s success story demonstrates the power of specialization and understanding your target market. Her unique gift shop thrives with profit margins ranging from 50-70%, proving that delivering value and convenience can justify higher prices.
Dave Hermansen’s unconventional perspective reminds us that profit per sale can often be more impactful than profit margins alone. It’s a testament to the nuanced strategies available to small business owners, each tailored to their unique circumstances.
Ultimately, understanding profit margins empowers you to navigate the intricate terrain of business management. It’s not just a metric; it’s a compass that directs you toward strategic decisions on pricing, expenses, and growth. By leveraging this knowledge, you can steer your small business toward financial success and sustainable growth.
As you continue your journey in the world of small business, remember that profit margins are your allies in achieving lasting profitability. Embrace the insights from experts, harness the power of specialization, and explore innovative strategies to ensure your business thrives in any economic landscape.
|Key Takeaways||Insights from Experts||Profit Margin Strategies||Financial Empowerment|
|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
This article, "What is a Good Profit Margin for Your Business?" was first published on Small Business Trends||
By: Rob Starr
Title: What is a Good Profit Margin for Your Business?
Sourced From: smallbiztrends.com/2023/09/what-is-a-good-profit-margin.html
Published Date: Wed, 20 Sep 2023 11:00:56 +0000