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!”
Read more: 20 of the Most Profitable Small Businesses