What's Your Profit Margin & How to Compare it With Your Industry

Every great business owner knows the importance of setting goals for themselves. It helps us measure progress and make sure we are on the right trajectory. As we see those numbers tick up we know we are heading in the right direction. Dips indicate it may be time to relook at how we do things.

But there is more to consider - right?

Eventually, we plateau or recognize there are just slow seasons with our business. We start to wonder what is normal or whether improvements need to be made. Some business owners look to a coach or consultant, others refer to industry metrics.

Industry metrics are an excellent way to gauge how your business is doing compared to others in your field. This is extremely important because you will oftentimes be dealing with the same opportunities and challenges as your competitors. 

In this article, we will be discussing your profit margin and how to compare it with your industry.

Profit margin is one of those key metrics we should keep our eye on. When analyzing your profit margin, it is especially important to consider the industry before making any big decisions.

First, What’s Your Profit Margin?

Before we begin comparing your profit margin with others in the industry, let’s take a step back to make sure we understand what profit margin is. 

Profit Margin is your revenue after all expenses are subtracted divided by your total revenue. It can be calculated as illustrated below:

Profit Margin = (Revenue - Expenses) / Revenue

This number is important to monitor because it helps a business understand its flexibility. If you are selling services with a 0 profit margin, you are breaking even. This leaves you with little flexibility to invest back into your business or handle financial challenges as they come up.

Likewise, if your profit margin is negative, this is an indication you may be actually losing money with every sale. 

Let’s be positive and assume your profit margin is positive - yay! The next step in improving your financial positioning is making sure your profit margin is reasonable (or great) within your industry. 

Why Should You Compare Your Profit Margin To Those In Your Industry?

Your Profit Margin percentage is not going to be one size fits all. Some industries will naturally have high profit margins. Others may have low margins making them a more challenging industry. Some industries may have profit margins that commonly fluctuate throughout the year. All this information is helpful when making business decisions.

For example, the profit margin for legal services is 15 - 20%. Whereas the profit margin for restaurants is generally 3 - 6%. This is a pretty large gap when referring to profit margins and making sure you are understanding the averages for your industry is what makes the information useful.

How to Find Your Profit Margin

We recommend researching the profit margin for your specific industry. Some research may guide you with what to expect within your field. Some industries may find they need to get even more specific with the industry average. 

Keeping with our restaurant example, it is common for full-service restaurants to bring in an average profit margin of 3 - 5%. This differs from fast food restaurants which can expect 6 - 9% and catering services which can pull 7 - 8%. 

In your research consider how appropriate it is to get more specific and go forward from there. 

How to Compare Your Profit Margin

Now that you have calculated your own profit margin and done some research into the industry average for your industry, it is time to compare the two. 

If you are finding your profit margin to be on the higher end of industry averages, this is great! You have found a way to appropriately price your products or services, while simultaneously keeping your expenses at a reasonable level. 

If you are finding your profit margin is below what you expected, there could be a few reasons why…

Your Expenses Are Too High

You may be spending too much money on generating additional products or delivering services. Take a good look at your expenses and consider the ways you can cut back. Consider how much you would need to cut back in order to reach your preferred profit margin percentage.

You Aren’t Charging Enough

Another completely plausible reason you aren’t hitting your profit margins is you are not charging enough. If you are finding there are no ways to cut your expenses or your pricing is very competitive, this could likely be the reason.

Measuring profit margin is one of the best indicators for a business owner to decide whether they are headed in the right direction. Working with your accountant to stay up to date on your profit margin will help you continuously analyze how to improve the operations of your business.

If you have yet to work with an accountant to analyze the profit margins of your business, consider scheduling a consultation with us. Let’s discuss your industry averages and where we can improve.