Master the Art of Business
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Profit Margin (often abbreviated to “margin”) is a measure of how much you keep of the revenue you collect from a sale. Businesses often use Profit Margin as a way of comparing offers.
Profit Margin (often abbreviated to “margin”) is the difference between how much revenue you capture and how much you spend to capture it, expressed in percentage terms. Here's the formula for Profit Margin:
If you spend $1 to get $2, that’s a 50 percent Profit Margin. If you’re able to create a Product for $100 and sell it for $150, that’s a Profit of $50 and a Profit Margin of 33 percent. If you’re able to sell the same product for $300, that’s a margin of 66 percent. The higher the price and the lower the cost, the higher the Profit Margin.
In any case, your Profit Margin can never exceed 100 percent, which only happens if you’re able to sell something that cost you nothing.
Profit Margin is not the same as markup, which represents how the price of an offer compares to its total cost. Here’s the formula for markup:
If the cost of an offer is $1 and you sell it for $2, your markup is 100%, but your Profit Margin is only 50%. Margins can never be more than 100 percent, but markups can be 200 percent, 500 percent, or 10,000 percent, depending on the price and the total cost of the offer. The higher your price and the lower your cost, the higher your markup.
Most businesses try to keep each offer’s Profit Margin as high as possible, which makes sense: the higher the margin, the more money the business gets to keep from each sale. Regardless, there are many market pressures that can lead to a decline in margins over time: aggressive pricing by competitors, new offers that decrease demand for older offers, and rising input costs.
Businesses often use Profit Margin as a way of comparing offers. If a company has more than one offer in the market, they tend to favor the offers with the highest margins. If a business needs to cut costs, it often starts by eliminating offers with the lowest margins.
When examining a business, pay close attention to Profit Margin. The higher the margin, the stronger the business.
"I never lost money by turning a profit."Bernard Baruch, financier and philanthropist
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Master the Art of Business