Many business owners wrestle with handling their funds and multiplying them. Cash flow is essential in every business. It is the bloodline of operations and a great gauge of how successful business efforts are.
To run a business, you must get into understanding the twists and turns and finance. This includes getting a good grasp of what profit margin is and how to compute.
But knowing the bare essentials isn’t enough. You must identify what is a good profit margin to keep your business running. On top of that, you must also understand the relationship of each percentage based on your revenue and expenses. All these fundamentals test your business acumen and knowledge as a business owner.
In this blog, we’ll answer the basic question, what is a good profit margin? We’ll also dive into different types of profit margins and how to compute each.
If you want to get insights into how vital profit margin calculations are to your business, you’re in the right place. Read on to discover these mysterious matters in profit margins:
What Is Profit Margin?
To put it simply, the profit margin is the money you have left after deducting your business expenses. A profit margin formula is used to compute the measure of your profit relative to your revenue. Remember that revenue and profit are not the same. Revenue is the money generated from all your business activities and operations. Profit is what you get after deducting your expenses from the revenue.
Profit margin is a profitability ratio that allows you to evaluate how profitable your business is. For example, profit margin measures the net income for every dollar you earn in your business.
There are three major metrics of profit margin: Gross Profit Margin, Operating Profit Margin, and Net Profit Margin. In the next section, we’ll discuss the profit margin formula for each metric so you can find out what is a good profit margin for your business.
How to Compute a Profit Margin?
Getting an average profit margin involves various calculations. These three metrics can give you insights into your financial health. These calculations would also help you make sound decisions at present and in the future. Make sure that each calculation is accurate so your investors and stakeholders know if they can rely on you.
1. Gross Profit Margin
One of the first ways you determine what is a good profit margin for your business is by getting the Gross Profit Margin. The gross profit refers to the amount of revenue that is left after deducting the Cost of Goods Sold or COGS.
COGS is composed of the costs needed to produce your products and/or services. This may include overhead expenses and costs of raw materials. Here’s the profit margin formula for Gross Profit Margin:
• To Get the Gross Profit:
Gross profit = revenue – cost of goods sold
• To Get the Gross Profit Margin:
Gross profit margin = (gross profit ÷ revenue) x 100
2. Operating Profit Margin
The next calculation you can do to know what is a good profit margin for your business is the Operating Profit Margin. You can get your operating profit by deducting COGS and operating expenses from your revenue. Operating expenses include all expenses necessary to sustain and run business activities. These include rent, payrolls, and more.
• To get the Operating Profit:
Operating profit = revenue – cost of goods sold – operating expenses
• To Get the Operating Profit Margin:
Operating profit margin = (operating profit ÷ revenue) x 100
3. Net Profit Margin
To know what is a good profit margin for your business, you must also get your Net Profit Margin. Net profit refers to what you have left in your revenue after deducting the COGS, operating expenses, taxes, and interest.
• To Get the Net Profit:
Net profit = revenue – cost of goods sold – operating expenses – interest – taxes
• To Get the Net Profit Margin:
Net profit margin = (net profit ÷ revenue) x 100
What Is a Good Profit Margin
If you also want to know what is a good profit margin for retail, we have some figures here for you. According to an NYU report stated in an article from Brex, the average profit margin is 7.71% across different industries. Naturally, you’d want to aim for a higher profit margin for your business.
If you must know what is a good profit margin for the business you own and run, you can use a general rule of thumb. If you have a 5% profit margin, it is considered low. You must aim for a 10% profit margin to be considered financially healthy. If you surpass that mark and get a 20% profit margin, it is already high and satisfactory for your business.
So, what is a good profit margin for retail? The average profit margin in retail varies. For general retail, it’s 2.44%. For online retail, it’s 4.57%. For grocery and food retail, it’s 1.44%. All these data were retrieved from Brex.
How to Increase Profit Margin
After knowing what is a good profit margin for your business, you need to do strategies to increase your profit margin. Here are a few things you can try:
1. Cut Down on Operating Cost
Operating costs are the hardest ones to reduce. These are expenses that run your business, so you risk your business’s activities. Operating expenses also vary per business, but since you already have a profit margin formula, you may compute this first.
Some operating costs include supplies. You can negotiate with your supplier to give you a better deal. You can also remove machines or equipment that you don’t need in your business. This can help you cut down on operating costs.
2. Implement Other Strategies to Drive Revenue
What is a good profit margin without efforts in increasing revenue? You can start by working on your brand to establish a reputable presence online or in the real world. Great branding builds trust, and this trust can lead to better sales. People are more likely to patronize your products if you can provide them value in their purchases.
You can drive revenue by increasing your marketing efforts, like implementing inbound marketing.
If you have a website, you can apply SEO practices to drive better traffic.
3. Create a Loyalty Program for Your Customers
Another way to increase profit margin is to concentrate on the services you give to your customers. You can start with establishing a loyalty program for regular buyers in your store.
After knowing what is a good profit margin for your business, you can reinvent your customer support services. Try being more creative with your loyalty program to get more customers and drive traffic to your website.
4. Increase the Prices of Your Products and Services
Finally, another way to increase profit margin is to increase the prices of the products and services you offer. Keep in mind that the price increase should be reasonable. If you add prices that are too high, you might drive customers away.
Be wise with your pricing strategy. You can start increasing the price after you have established a name in the business. Don’t increase your prices without conducting adequate research about your customers’ power to purchase and other related pricing concerns.
How to Find a Good Profit Margin for Your Business
What is a good profit margin for your business? To find your profit margin, you can use the profit margin formula we provided in each profit margin metric. You can also compare your profit margin to the average profit margin for retail. There’s also a standard you can use to know if your profit margin is good: 10% is considered healthy, 20% is high.
If you want to make your own business, you can start by creating an ecommerce site or online store with Strikingly. Here are some features from Strikingly that you will definitely enjoy:
• Plenty of Templates to Choose From
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Strikingly offers a wide array of templates to choose from. The look of your ecommerce site would influence the way customers perceive your business. Selecting a great template is an excellent first step to make a successful online business.
• An Easy-to-Use Website Editor
Image taken from Strikingly product
Strikingly's website editor is extremely easy to use. Even absolute beginners can understand its tools and features. After determining what is a good profit margin for your business, you must apply the results into how you'll create your ecommerce site. Strikingly's editor can transform your ideas into an exceptional website design and structure.
• Can Connect or Register a New Domain
Image taken from Strikingly product
Strikingly makes it easy for you to connect a domain. First, you need to generate a brand name for your business and choose a domain name. Then, check if the domain name is available. You can buy a domain through Strikingly for only $24.95 per year.
• Built-In Site Analytics
Image taken from Strikingly product
Apart from knowing what is a good profit margin for your business, you must also use data from your website's activities to make sound financial decisions. Fortunately, Strikingly offers built-in analytics that you can use to assess how well your business’s website is performing.
Answering the fundamental question "what is a good profit margin" won't be an easy feat. Every business has its own unique financial goals and limits. Using each profit margin formula will help you determine your business’s financial health. To start your journey into business, you can create your Strikingly account today and enjoy its features.
