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How to determine good margins for your business

Posted by Shivali Anand

November 15, 2021    |     3-minute read (473 words)

Margins are historically relatively tight in some industries, like the food sector, but they can be substantially wider in others, like electronics. As an entrepreneur, you’ll have to set the correct margins for each product or service you sell to ensure the long-term profitability for your company.

Consider the following suggestions for developing the right margins for your business.

Examine these crucial elements

Profit margin is what differentiates the product's manufacturing expenses, including labor and overhead, and the selling price. The first stage in assessing how successful your firm may be is to determine the correct margins — the larger the margin, the bigger the business’s profits. But you don't want your profit margin to be so significant that pricing scares people away. Business owners can assess how much profit they can build per unit or client beyond their product or service cost by using the following parameters.
  • Nature of the business

    – Business type typically has a strong influence on margin. For example, a big-box retailer's clothing margins may be small, but a luxury boutique's clothing margins may be more significant.
  • Customer preference

    – If your target customer is not budget-conscious, a more significant margin for an extra value in your product or service may be acceptable. The margin of a product or service is often determined based on the demographics of its consumers.
  • Competition

    – You can estimate a margin on your cost by assessing what rivals charge for similar items. Based on conditions, you can choose a modest or high margin above the product’s cost, as shown below.
  1. High Margin

    – If your product is of superior quality or performs better than that of your rivals, typically that means you can increase your profit margin. Consider setting a more significant margin if you have a unique selling feature or product, or if you're an early provider of a technology or service that no one else offers.

  2. Low Margin

    – To maximize profit while remaining competitive, sell your goods at the same price as your competition to start. After you've established brand loyalty with clients, you can gradually increase your margin.

  3. No profit margin, or below-market pricing

    – If you're a startup, offering lower costs than competitors can convince consumers to test your products or services. Reducing costs may also divert customer attention away from competitors and enhance brand awareness and loyalty. After creating a foothold in the market, you could expand margins to represent demand within the market in the long term.
  • Supply and demand

    – External events, like increased competition or a recession, can cause significant changes in the market for your product or service. To deliver value to your clients and preserve sales, consider lowering your margins accordingly. On the other hand, to raise margins further above the cost of products, entrepreneurs should consider increasing the price of bestsellers and offering bundle pricing.

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