finance, Small Business

Sexy Profit Margins

I have started writing this blog post a few times. How in the world do you make profit and profit margin sassy and sexy and interesting? I have no real ideas. But here’s an interesting story where I apparently told off a Senior Vice President without realizing it.

The Senior Vice President (SVP) of a Fortune 500 company that I worked at had a breakdown of sales by category. He was explaining to my boss and me why we needed to sell certain product items in the stores. My job was to make sure that the company’s real estate leases were in compliance. At some point, he said the profit margin for this category was 30%. (Please note that at this point in my life, I cannot actually remember the number so I am making something up). And then he continues, “Profit margin is percentage of net income divided by sales. It tell us the percentage of how much money we make by selling a product…” At some point, I cut him off. “I have an MBA. I know what a profit margin is.” Without missing a beat, he then explains the real estate portion of the conversation.

Later that day, my boss stopped by my desk and remarked how bold I was to stop the SVP and tell him that I knew what a profit margin was. Of course, I didn’t even remember anything about it. I was embarrassed, not knowing that I broke some sort of rule. I was simply trying to save him time and effort. The more I thought about it though, I realized that I did not need to be embarrassed that I cut off the SVP.

So, profit margin is the percentage amount of money the company makes off every sale. Profit is the actual dollar amount. Profit margin is a percentage.

Typically grocery stores sell products at very low amounts, make a little money over the actual cost to buy the product, and therefore, have low profit margins. Like 2 -3 % margins. On the flip side, luxury products typically have high profit margins. While their cost to make or buy the raw materials may be high, customers are willing to pay lots more, like WAY lots more, than what it costs the company to make it.

I have no idea about Apple’s profit margins, but let’s take a wild guess. The iphone X or whatever model, is about $1,000. Let’s take a wild guess that it costs Apple $100 to make the product. That’s $900 left. So the profit margin for this one product is $900/$1000= 90%. Of course, companies look at profit margins for specific items, at a product category, and also profit margins of the company as a whole.

If you are a small retailer, you can potentially make the same amount of money by selling one high profit margin item or multiple low profit margin items. The product mix for your company is an entire different blog and topic. It may be more difficult to find people to buy the high profit products so you many need a nice balance of low profit and high profit products to get customers in the door. You can make a lot of money selling a couch. But how often will your customer buy a couch? Instead, you sell a lot of shirts and home decor signs.

Here’s your call of action: What is the profit margin for your entire company? What is the profit margin for your individual products? Can you find ways to market and sell more of the high profit margin items?

So the next time you are in an impromptu meeting with the Senior Vice President and  your boss, feel free to interrupt and tell him you know what profit margin is and he can skip that part.

 

 

 

 

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