What Is a Good Profit Margin for Retail Businesses?

Your Complete Guide to Profit Margins for Retail Businesses

Posted 4 years ago by Max Komonov

혫Profit margin혬 is桂one of桂those business-y sounding words that seems a桂lot more complicated than it桂really is.

Essentially, a桂business�셲 gross profit margin is桂a桂measurement of桂how much money a桂company is桂making. For example, if桂it桂takes $1桂to桂make a桂product and桂you sell it桂for桂$2, you�셶e got a桂50% profit margin.

That�셲 the桂basic idea, but let�셲 be桂honest: in桂practice, it�셲 a桂little more complicated than that. And there are some factors that influence profit margins that are important to桂think about. Plus, what is桂a桂good profit margin for桂retail?

We�셶e got you covered.

What Should You Know About Profit Margins?

So桂we桂already know that gross profit margin can be桂calculated by桂accounting for桂the桂cost of桂production and桂the桂final sale price. But what�셲 the桂actual gross profit margin formula?

Ok, get ready for桂some math (stick with us桂here).

How do桂you calculate gross profit margin?

First, subtract the桂cost of桂goods sold (COGS) from the桂net sales. Next, divide the桂resulting number by桂the桂net sales to桂calculate gross profit margin as桂a桂decimal. Convert the桂decimal to桂a桂percentage to桂find gross profit margin. Here�셲 an桂example:

A桂business makes $5,000,000桂by桂selling phone cases.
While making the桂phone cases, the桂company creates $2,000,000桂in桂labor and桂material costs.
To桂calculate her company�셲 gross profit margin, the桂CEO subtracts the桂COGS from net sales ($5,000,000桂minus $2,000,000桂=桂$3,000,000).
Next, she divides that resulting number by桂her company�셲 revenue to桂get a桂decimal ($3,000,000桂divided by桂$5,000,000桂=桂0.6).
After converting the桂decimal into a桂percentage, she finds that production costs consume 40% of桂sales, resulting in桂a桂60% gross profit margin.

Why does Gross profit margin matter?

Gross profit margins are an桂indicator of桂your retail business�셲 health. Understandably, if桂the桂margin is桂too low, you won�셳 make enough money.

What is桂Net profit margin?

If桂you�셱e learning about gross profit margins, you�셪l probably come across 혫net margins.혬 So桂what is桂a桂business�셲 net margin? Think of桂it桂like this: Gross profit margin is桂how much money is桂left over after subtracting the桂cost of桂goods sold, while net profit margin is桂how much money is桂left over after accounting for桂things like operating expenses, debt, and桂taxes桂�� as桂well as桂the桂COGS.

What Is桂a桂Good Profit Margin for桂Retail?

Profit margins vary from industry to桂industry桂�� by桂a桂lot.

According to桂, the桂advertising industry typically sees gross profit margins of桂about 24%. Meanwhile, the桂pharmaceutical industry enjoys margins slightly over 70%. And that wide range doesn�셳 stop with commercials and桂drugs.

Gross profit margins by桂industry

Education: 41.15%
General Electronics: 26.53%
Food Wholesalers: 15.49%
Online Retail: 42.53%

So桂profit margins vary, but what is桂a桂good profit margin for桂retail? While there isn�셳 a桂specific number to桂aim for, you can get a桂better idea of桂good profit margins for桂retail by桂looking at桂.

Women�셲 clothing: 46.5%
Shoes: 42.6%
Supermarkets and桂Grocery Stores: 28.8%
Pet Supplies: 43.6%

So桂yes, like a桂lot of桂things in桂business, there isn�셳 a桂one-size-fits-all answer to桂혫what is桂a桂good profit margin for桂retail?혬 But ultimately, you really can�셳 have a桂gross profit margin that�셲 too high as桂long as桂your business is桂gaining that capital sustainably. So桂how do桂you make sure your profit margin is桂healthy?

How To桂Ensure a桂Good Profit Margin for桂Retail

What is桂a桂good profit margin for桂retail? It桂depends on桂the桂industry, but the桂steps to桂ensuring your business has healthy margins will generally look similar no桂matter the桂number you�셱e aiming for.

To桂learn about these margin-maximizing strategies, let�셲 look at桂what influences profit margins so桂we桂know what parts of桂the桂business we�셱e dealing with.

What influences profit margins for桂retail businesses?

Number one: Operating costs

Operating costs (including things like paying employees, purchasing shipping materials, and桂savings funds for桂marketing campaigns) have to桂be桂subtracted from your revenue when you calculate your retail business�셲 net profit margin. If桂operating costs are too high, the桂business might not make enough money to桂function.

Number two: Marketing practices

Poor marketing practices will depend on桂the桂business, but if桂your company is桂pursuing ads that don�셳 make the桂sale or桂flyers that aren�셳 connecting with shoppers, your operating costs will go桂up桂and桂your net profit margin will go桂down.

Number three: Pricing

This one may seem obvious, but pricing really is桂a桂big factor in桂both gross and桂net profit margins. But don�셳 just think about prices that are too low. If桂your company prices its products too high, you might lose potential customers. Sometimes, a桂low price, high volume business model is桂best.

How do桂you create a桂good profit margin for桂retail?

You can make sure your business�셲 profit margins are healthy by桂looking at桂wasteful practices associated with the桂three margin-influencers listed above.

First, think about what costs your business money in桂general and桂make changes to桂minimize loss. Be桂on桂the桂lookout for桂unused or桂inefficient services, like old accounting software, and桂find more cost-efficient alternatives.
Next, develop a桂more advanced marketing strategy that prioritizes impactful mediums, such as桂digital ads. ( if桂you don�셳 know where to桂start.)
Finally, avoid missing your ideal pricing target by桂accounting for桂factors like the桂market average, manufacturer recommendations, and桂customer psychology. Ultimately, prices need to桂reflect what the桂shopper is桂willing to桂pay.

Profit Margins and桂Ecommerce

If桂you�셱e ready to桂improve your retail business�셲 profit margins, expanding into ecommerce might be桂the桂right move. that online retail stores have some of桂the桂highest gross and桂net margins in桂the桂retail market桂�� with ecommerce retail enjoying gross margins more than 18% higher than the桂general market.

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About The Author

Max has been working in the ecommerce industry for the last six years helping brands to establish and level-up content marketing and SEO. Despite that, he has experience with entrepreneurship. He is a fiction writer in his free time.

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