Profit margins are a key metric for businesses all across the world, but they can be especially important for those operating in developing and emerging markets. This is because you do business while dealing with unique challenges, such as lower purchasing power and less developed infrastructure. These challenges can make it difficult for businesses to achieve high profit margins. However, by applying these 10 ways to improve your net profit margin, your business can still be very successful.
The general rule about profit margins is:
- 5% is a low margin
- 10% is a good margin, and
- 20% or more is a high margin
So, does this mean that your business should always aim for the 20% profit margin?
Answer: it depends.
Let’s first look at the different types of profit margins in your business.
Types of profit margins in your business
Gross profit margin
Gross profit margin is the difference between revenue and cost of goods sold (COGS) divided by revenue. It measures the profitability of your products or services.
Gross profit can be found using the following formula:
Gross profit = revenue – cost of goods sold
After you calculate gross profit, you can determine the gross profit margin using this calculation:
- Gross profit margin = (gross profit ÷ revenue) x 100
The gross profit margin tells you whether your pricing strategy is good. It also tells you if your business is able to control its costs..
A business with strong total sales may appear healthy, but it might actually be operating at a loss if operating expenses are too high.
A high gross profit margin indicates that a business is able to sell its products or services at a premium price. A low gross margin suggests that the business is not able to charge premium prices or that it is struggling to control costs.
Operating profit margin
Operating profit margin is the difference between revenue and operating expenses divided by revenue. This metric measures the profitability of your business operations.
First, calculate your operating profit:
- Operating profit = revenue – cost of goods sold – operating expenses
Then, calculate the operating profit margin:
- Operating profit margin = (operating profit ÷ revenue) x 100
It is a good indicator of the efficiency of your business and your ability to control costs.
A high operating margin indicates that a company is able to generate a lot of profits from its operations. A low operating margin suggests that a company is not efficient or that it is struggling to control costs.
Net profit margin
Net profit margin is the difference between revenue and all expenses divided by revenue. This is the most comprehensive measure of a company’s profitability.
Calculate your net profit using this formula:
- Net profit marin = revenue – cost of goods sold – operating expenses – interest – taxes
After that, calculate your net profit margin:
- Net profit margin = (net profit ÷ revenue) x 100
A high net margin indicates that a company is generating a lot of profits. A low net profit margin suggests that a company is not generating enough profits or that it is struggling to control costs.
To improve your net profit margin will require you to also pay attention to your gross profit margin and your operating profit margin. Because, if the prices you are charging are too low, or your business operations are too expensive, you will keep making a loss.
Focus on your net profit margin
For businesses in developing and emerging economies, the most important margin to focus on is the net profit margin.
This is because these markets often present additional challenges, such as higher taxes and tariffs, that can eat into a business’s gross and operating margins. By focusing on the net margin, businesses can get a more accurate picture of their overall profitability.
But if your business is not profitable, you first need to analyse why this is the case. After that, you can work on ways to improve your profitability.
What is a good net profit margin for business?
In developing and emerging economies, the average net profit margin is 5-10% for all businesses.
However, this can vary depending on the industry.
- First of all, know that some companies are inherently high-margin or low-margin ventures. This is because of the way they operate.
For example, supermarkets and retailers have low margins. They have high expenses for inventory, employees and contract workers, distribution and facilities.
At the same time, low-margin goods, like food and some consumer products, are easier to sell.
Consulting companies and IT-service businesses usually have high margins. This is because they have lower operating costs, limited inventory, and do not require large amounts of funding to start.
Sellers of luxury products, like retailers that sell expensive jewelry, can also fall into this category.
- Secondly, the age and size of a business also influences profit margins. New businesses often have higher profit margins than large or established firms. This is because even though they have fewer sales, they usually have lower overhead costs.
- Thirdly, the location of business has an impact on profit margins. If your business is located in a rural area of the country with mostly low-income customers, your profit margins will likely be lower than if you are located in the capital.
Here are a few examples of typical profit margins for different industries:
- Agriculture: 2-5%
- Manufacturing: 3-7%
- Retail: 4-8%
- Services: 6-12%
- Technology: 10-15%
Note: these are just rough estimates. Net profit margins can also vary depending on the specific business and market conditions. For example, if your business can clearly distinguish itself from competitors, you will be able to charge higher prices. Which will help you get higher gross profit and operating margins.
It is also important to remember that profit margins are not the only metric that you should consider when you are evaluating the performance of your business. Other important metrics include revenue growth, return on investment, and customer satisfaction.
10 ways to improve your net profit margin
Focus on increasing efficiency and reducing costs. This can include implementing better inventory management systems, streamlining operations, and negotiating better deals with suppliers.
At the same time, you should also focus on growing your revenue by expanding your customer base and increasing sales.
1. Improve your inventory management
You can increase efficiency and reduce costs is by implementing better inventory management systems. This can include using software to track inventory levels, setting up automated reorder points, and implementing just-in-time inventory systems.
By better managing inventory, businesses can reduce the amount of money tied up in inventory, which can help to increase profits.
2. Streamline your operations
Another way to increase efficiency and reduce costs is by streamlining operations. This can include automating processes, outsourcing non-core functions, and implementing lean manufacturing techniques.
By streamlining operations, businesses can reduce the amount of time and resources that are needed to keep the business running.
3. Focus on cost-cutting measures
This can include reducing energy costs by implementing energy-efficient practices, cutting unnecessary expenses, and negotiating better deals with suppliers. You should also research if there are any government incentives and subsidies that may be available for businesses.
4. Build strong relationships with customers and suppliers
Many of the businesses that I work with have spent time building good relationships with their suppliers, but they have not put that same amount of effort into building relationships with customers.
Building relationships with customers can help to increase loyalty and encourage repeat business. This leads to higher revenues and lower costs.
By providing excellent customer service and building trust with suppliers, your business can create long-lasting partnerships with customers and suppliers that create new ways to improve your net profit margin.
5. Enter new markets and diversify
Expand your operations by entering new markets and diversifying your product or service offerings. This does not have to be hard.
One of the easiest ways to do this is to ask your most profitable customers what products or services they would like you to add to your business.
You can also look for ways to sell your products or services to new customer segments. For example, if you are a bakery selling to private individuals, look into ways to start delivering to businesses. This strategy can help to increase revenue and reduce risk.
6. Focus on innovation and differentiation
By offering unique products or services, businesses can charge premium prices and increase their profit margins. Again, this does not have to be hard or expensive.
For example, a business that produces a unique type of agricultural crop can sell this for a higher price. And a business that offers a unique type of marketing service can charge higher prices than their competitors.
You can also focus on using new technologies or processes to improve efficiency and reduce costs. After the initial investment, you will be able to operate at lower costs than competitors.
7. Build a strong brand
A strong brand can help to increase customer loyalty, which can help to increase revenue and reduce costs. This is very closely linked to understanding your unique selling proposition (USP). A unique selling proposition makes it possible for you to distinguish yourself from competitors, even if they are selling the same products as you.
For a global example, compare Nike and Adidas. Both of them sell sneakers, yet there are customers who prefer Nike and who will never buy Adidas. This is because Nike has a strong USP as well as a strong brand. They also do great marketing to back this up!
A strong brand can make customers willing to pay a premium price for a product or service. It can also help to attract new customers and increase your market share. This makes it one of many great ways to improve your net profit margin.
8. Focus on sustainability as much as possible
This is a topic that is becoming more and more important. Consumers are becoming more aware of the impact of their purchasing decisions on the environment.
By implementing sustainable practices, businesses can attract environmentally-conscious consumers and may be able to charge a premium price for their products or services.
Additionally, sustainable practices can also help to reduce costs by reducing waste and increasing efficiency. This leads to lower costs for businesses. Introducing sustainability in your business does not have to be expensive.
Here are some ways that your business can become more sustainable at low cost.
9. Build a strong online presence
Another important strategy for businesses in developing and emerging economies is to focus on building a strong online presence.
With the rise of e-commerce, businesses can reach a global market and increase their revenue.
But if you are selling on Alibaba and I am interested in your products, I will first want to learn more about you before I trust you with my money. This is where having a good online presence – like a website or regularly updated Facebook business page – can be helpful.
Additionally, businesses can also reach customers in remote areas and reduce costs by not having to maintain a physical storefront.
Furthermore, businesses can also use online platforms to build their brand, increase customer engagement and improve customer service.
10. Don’t spend money unnecessarily
Make sure that you are aware of local laws and regulations that may affect your operations.
For example, your government may decide to change the way taxes are filed and introduce higher tariffs. By understanding and complying with these regulations, you can avoid fines and penalties that can eat up your profit.
Ensuring that you are up to date about business laws and regulations is one of the easiest ways to improve your net profit margin.
Conclusion
In conclusion, profit margins are an important metric for businesses in developing and emerging economies. By focusing on ways to improve your net profit margin, your business can achieve success in spite of the challenges that you face in your home market.
Additionally, focus on building strong relationships with customers and suppliers in order to increase loyalty and repeat business, which can help to boost revenue and reduce costs.
Furthermore, you can also focus on expanding your operations by entering new markets and diversifying your products or services to increase revenue and reduce risk.
But always remember that profit margins are not the only metric to consider when evaluating the performance of your business.
