How Do Companies Generate The Highest Profit Margins?

Whoever invented Doritos was a genius.

I love my Doritos, and I’d be willing to pay more for them, if necessary. How much more? I’m not sure, but if the price went up 50 cents for a bag, I might be able to live with it.

We all have products and services that we think (perhaps falsely) that we can’t live without. We’re attached to them, and we’re not willing to buy a competitor’s product or (God forbid) buy a generic version of the product. A generic version of Doritos? No way.

This type of brand loyalty is a factor that can drive a high profit margin. Other factors are low production costs, and a lack of competitors, which allows the company to set a much higher sales price.

If you overprice your product, or judge consumer demand incorrectly, your business can really suffer.

Sell Hammers, Not Lawn Mowers

Sometimes it’s smarter to sell a $5 hammer, rather than a $300 lawn mower.

Huh?

That doesn’t make sense- I’d rather sell a $300 item than make $5. Well, if you consider profit margin- and not the sale price- you might be better off with hammers.

Profit margin is defined as (net income / sales), and it represents the dollar amount of profit you make for each dollar of sales. Profit margin is a great tool to measure profitability, because you can assess products at different sales prices. If you earn $1 for each $5 hammer, the profit margin is 20%. On the other hand, a $45 profit on a $300 lawn mower is only a 15% profit margin.

Speaking strictly about profit margin, you’re better off selling hammers.

The Illusion of Luxury Goods

It may surprise you, but some of the most viewed Vloggers on You Tube talk about make up and fashion. Millions of views and subscribers.

Why?

Because fashion, beauty and luxury goods are important to lots of people. So important, in fact, that people are willing to pay a huge premium for luxury products.

Peter Baskerville has a great comment about cosmetics:

“That’s why they are at the ground floor near the entrance of most department stores. Cosmetic marketing creates huge value in the customer’s mind with a strong emphasis on hope and backed up by exquisite packaging, pseudo-scientific ‘miracle’ ingredient and persuasive counter selling techniques.”

So true

Luxury goods, such as cosmetics, jewelry, clothing and perfume, can make a huge profit margin, if they market to an audience that is willing to pay a big premium for the product.

When You Really Need an Expert

Forbes points out that, as of 2017, the average private U.S. Company has a net profit margin of 8.9 percent. Sageworks performs an annual study of the most profitable industries, and some are listed below:

  • Accounting, tax preparation, payroll companies: 18.4% average net profit
  • Real estate leasing, legal firms: 18%
  • Dentists, lawyers and doctors

So, what do they have in common? These are professionals that we rely on, and we’re willing to pay a premium to get competent advice. How much does it cost to prepare a tax return, represent me in a legal case or perform surgery? I don’t know for sure- but I’m not going to push back much on the price.

The Lesson

If you’re starting a business, or pricing a product or service for your existing business, pay attention to these statistics. The industries discussed above provide a product that consumers either really want, or solve a problem that must be solved competently. Use these examples as a yardstick to value your services and products.