It’s safe to believe that the more goods you sell, the higher your income. However, your real earnings from each transaction rely not only on what the consumer pays but also on what your costs are. Not all profit margins are made equal.
High-margin goods profit you the most from every sale, so these sales are particularly necessary for your enterprise. A high-profit margin is a substantial difference between what you pay and what you receive from selling your goods.
High-margin operations, goods, and so on offer a considerable income relative to the amount of money spent on doing or making it. Continue reading if you want to know more about what high margin means.
Advantages of High Margins
The first advantage of high-margin goods and services is you don’t need to have a high volume of sales to make a fair profit at the end of each month.
For example, consider a bakery. If you made a 50 percent margin on premium cakes, rather than a 5 percent margin on cheap cakes, you would just have to sell 10 percent of the pieces of cakes to make the very same profit.
Additionally, if you weren’t able to sell them all by the end of the day, it would make the expense of discarding the left-over inventory even more manageable. It can be disastrous to have a left-over list of low-margin items.
Disadvantages of High Margins
It is a risky strategy to just focus entirely on high margin items. In a harsh economic climate, it is unpredictable primarily when consumers focus on value.
High margin products are good for your bottom line. But if you only concentrate on high-end luxury products, they might not be able to sustain you on their own in the long run.
High Margin Industries
Inherently, certain types of enterprises are more competitive than others as they use business models with significantly higher margins. Businesses providing services generally have higher margins than companies dealing with physical products, which is no coincidence.
When nothing physical is sold, you don’t have to purchase materials. The only variable cost which is subtracted when determining gross profit is labor costs.
Accounting is a business with exceptionally high margins, gaining an overall income of 18.3 percent. Legal services and real estate rentals are both extremely high-margins, especially if these firms keep their overhead low.
Wholesalers and producers of food and beverages tend to have minimal margins. However, food staple suppliers that still net substantial earnings based on volume as people have to eat each day can only use the services of their accountant every year at tax time.
Establishing a High-Margin Business
A high-margin business always comes down to the product or service available. When you sell luxury goods, the products will typically be priced at a high margin.
The value of a luxury product also arises from its perceived value or the prestige generated by the brand as much as any intrinsic quality. Fewer customers may be interested in what you’re selling. Still, they’ll be willing to pay a premium to get more than your competition is offering.
Scarcity can lead to high margins, too. This has been the characteristic of many pharmaceutical companies, particularly if one company has the only drug capable of curing a particular disease or disorder. The same may be said of services.
If you were the only makeup artist or computer technician with a full schedule within a 100-mile radius, you might offer your services at a considerable margin.
That would mean higher revenues, but if you aren’t the only one, you’ve got to make sure your high margins don’t hurt your business.
Through understanding the margins that you reap from the various types of goods that you sell or the services you offer, you can build a combination of the two that provides both high and low margin items profit.
You don’t always have to make significant changes to your business to improve the bottom line significantly. A slight tweak in your price or a phone call to your supplier can pave the way for higher margins, leading to higher profits.