Why Your Profit Margin Is Not Important

Profit margins seem to be main focus of executives and small business owners.

Everyone from the CEO of General Motors to your average eBay seller is focused on it.

But think fo what a profit margin actually representations. It's not an indication of how much money you are actually making, it's only a figure that tells what the profit portion is as a percentage of the total sale.

In other words a $ 10 profit on a $ 100 sale means that your profit margin is 10%.

Now let me ask you this, let's assume your average profit margin is 100%.
That type of profit margin would make any business owner envious.
But what if the total sale was only $ 2?
Your actual profit would only be $ 1, even though you are working a high profit margin.

I am sure you realize how many products you would have to sell to make any serious money.

But what if your profit margin was only 5% on a $ 100,000 sale?

Your actual profit would be $ 5,000. In net terms you are making more money even though the profit margin is 20 times smaller than in the above example.

That's the real reason your profit margin is not important. What is important is your actual net profit.

Profit margins are good formulas for general accounting and investment decisions.
But as a business owner your determining concern should be your net profit.

Need more convincing?

Let's look at your average dollar store compared to your average car dealer.

The dollar store is working on a profit margin of up to 300%, while the car dealer is working on a profit margin of as little as 10%. Let's further assume that the dollar store sells consistently dollar items and the car dealer focuses on $ 20,000 cars.
Using these figures the dollar store will have to sell roughly 4,000 items to earn the same
profit as the car dealer does with one sale.

So what's the important lesson you should learn?

The lesson for retailers, flea market vendors, eBay sellers, and all business people is the following.

Focus on selling more expensive items. You can always use lower end items to attract customers but make your real money with high end products.

You will need allot less sales to make a decent living provided that you sell high end merchandise.

We will be happy to hear your thoughts

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