High margin vs low margin

High margin business just means that costs are low compared to revenues. But defining revenue or costs as high or low in isolation doesn't really make sense in my eyes. 

E.g. what means a business has high revenues? Is 1 million high? Is one billion or one trillion? To give an example, think of four companies:

1. A 1-man consulting business that earns $500k in revenue per year and limited costs for IT, travelling, etc. of $100k => Margin: 80%
2. A small contractor with revenue of $1M and employee and material costs of $800k  => Margin: 20%
3. A consulting firm like MBB with revenue in the $10B with costs of $5B => Margin: 50%
4. A global steel manufacturer with revenue of $20B with costs of $18B => Margin: 10%

Company 1 and 3 have high margins, but one has low revenue and low costs the other one has high revenue and high costs. Company 2 and 4 have low margins, but one has low revenues, one has high revenues.

BUT: The words high and low are meaningless because you're comparing different industries and businesses with each other. Low costs are only low if they are significantly lower than your revenues. High costs are high because they eat up a large share of your revenues.

Hope this clears it up a bit.

Hi there,

The typical profit margin formula is the following:

Profitability = (Revenues – Costs)/Revenues

From the formula, you can see that high profitability is related to high revenues compared to costs. It is the relationship between the two that matters, not the absolute amount of one of the variables in isolation.

Best,

Francesco

Hi there,

Adi said it best - margins are the relationships between revenue and cost...you cannot isolate the two.

So, essentially all of your statements are correct. You can sell $1 pens that cost you only 10 cents to make. You can have an airline industry that sells $1k seats but makes $50 per seat because planes are expensive. And yes, you can sell shake shack burgers for $5 but only make 50 cents per burger because property/staff/ingredient costs are not low enough!

Margin is an interplay between revenue and cost and will vary from one industry to another. Margin generally is used as an indicator of how well a company is controlling its costs. So the higher it is, the better the company performs & grows. What could be high margin in one industry (e.g. commodity or grocery) could very low in another (e.g. professional services). So, margin is relative and not absolute. 

It is important to compare only the profit margin of companies within the same industry. Different business models in various industries results in widely varying margins.

Hi, it's only about the ratio between costs and revenues. Only when there is a big difference between them you'll enjoy high margins

Best,
Antonello