What Is Low Profit Margin?
If you have a low profit margin, this means that the selling price you chose for a good isn’t much higher than its cost. If your company has a low profit margin, you’re likely in a very competitive industry, offering products that aren’t highly unique. But there are still many ways that you can increase your net profit. Consider focusing on making your company more efficient in terms of overhead spending to keep your net incomes positive.
If you’re running a company with a low profit margin, you should consider focusing on optimizing processes and cutting costs for supplies, because there isn’t much revenue to cover mistakes. A low profit margin may also indicate that there are some ways that you could alter your business to maximize productivity with minimum wasted expense or effort.
Say you run a clothing store and have a great supplier providing you with low-cost fabric. If your competitor pays a premium for fabric, they’ll likely have a lower profit margin than your company will. Labour is another important factor that affects the profit margin. If it takes your competition twice as long to make a dress, they have to recoup twice as much labour expense.
In general, profit margins are lowest in industries involving food. For example, if you run a restaurant, you likely have low margins. The revenue you earn has to cover the costs of the food, meal preparation, and service.
Retirement communities and assisted living locations have a low profit margin because of large overhead requirements. In addition, stores selling office supplies typically cannot charge higher margins, because there’s a variety of similar goods available in the market.
Just because you may run a low-margin company doesn’t mean you necessarily need to make drastic changes. For example,Walmart is a low-margin company, but they make up for it with extremely high volume that gives them a fantastic net profit.
