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Profit Margin

Capterra Glossary

Profit Margin

A profit margin, also referenced as a net margin, is the percentage of product or service sales that has been converted to company profits. In other words, a business' profit margin is how many cents on the dollar they make for every dollar they earn. 

For example, if a company claims to have a 48% profit margin last quarter, it actually means that it earned a net income of $0.48 for every dollar accrued from company sales. Companies use their profit margin to gauge how well they are handling their finances. 

That being said, it's important to note that a low profit margin doesn't necessarily mean a business is struggling to turn a profit. It can mean that the company compensates for earning less cents on the dollar by increasing its volume of products or services sold. However, if a company has a low profit margin and doesn't sell many of its offerings, it's unlikely to survive long on the market.

What Small and Midsize Businesses Need to Know About Profit Margin

Small and midsize businesses with stable, high profit margins often use their profit margins to persuade investment groups to invest in their business. Investment groups look to invest in successful companies with a proven track record of turning a profit and staying competitive in their market sector. 

On the other hand, small businesses with low profit margins often operate in highly competitive market sectors and can be greatly affected by market fluctuations. If a smaller business with a low profit margin wants to increase its net income, the business should consider restructuring their pricing strategy. The best way to increase a low profit margin is to pay less to acquire a product and service offering, and then sell those products and services for a higher price.

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