What Is a Reasonable Profit Margin? (2024)

If your business only made a 2 percent profit margin, would you be happy? Probably not. But in one industry, the owners may be ecstatic when they make that much, while in others, profit margins are significantly higher. So what is a reasonable profit margin? The answer is that it depends on the industry and the company's stage of development. For example, is it a new business or has it matured?

Selecting a business with a reasonable profit margin depends on several factors such as competition, location, talents of the owner and amount of capital to invest. More important, an aspiring new business owner has to choose an industry that she will enjoy. Just looking at the profit margin by itself is not the end of the story.

Industries That Provide Services

The businesses with the highest percentage of profits tend to be those that provide some type of service. Accountants and tax return preparers top this list, with a profit margin of 18.4 percent. These skilled workers also provide bookkeeping and payroll services. It's simple: People will always need accountants and bookkeepers, regardless of the state of the economy.

It's well-known that hiring a lawyer is expensive, and they have the profit margins to prove it. The legal-services business has a profit margin of 17.4 percent. Law offices have low operating costs and a high volume of repeat customers; they do not have to spend money on equipment and tools.

Real Estate Businesses

Businesses related to real estate have good profit margins. Lessors of real estate earn a margin of 17.4%. These include rentals for apartments, houses, self-storage facilities and mini-warehouses. Real estate agents and brokers also do very well, with profit margins averaging 14.8 percent.

Health-Related Industries

It's commonly accepted that everyone should visit their dentist twice a year, right? Your dentist probably likes this commitment, because it helps him earn a profit margin of 14.9 percent. To be fair, he does have to invest in some sophisticated equipment, but a continuous flow of repeat patients helps him make the loan payments.

General physicians also get their share of patients who want to take care of themselves. Doctors' offices earn an average of 14.1 percent. However, most doctors come out of medical school with huge student loans, so they need a good margin to pay this debt.

The trend toward more outpatient care give these centers good profit margin. The average for outpatient care centers is 15.9 percent. These profit margins are projected to stay strong because of the increase in the number of people insured and the practice of using outpatient treatment rather than checking people into hospitals for overnight stays.

Least Profitable Businesses

Businesses operating with slim profit margins have little room for error. They have to focus on generating more sales volume and keeping tight controls on expenses. Typically, these are highly competitive industries that make it difficult to raise prices.

Bricks and Mortar Retail Stores

An industry with an average 2.5 percent profit margin is the grocery store. This business depends on high sales volume and quick inventory turnover. A grocery store owner who makes 3 percent would be ecstatic and making plans for a Caribbean vacation.

Lawn and garden dealers are in the same category. They earn an average of 2.0 percent. Building materials and supplies dealers come in with margins of 3.2 percent. Again, these are tight markets that also have competition from the big-box stores.

You might think automobile dealers, with their huge lots and splashy showrooms, would make high profit margins. They don't. Auto dealers have an average profit margin of 3.2 percent. But don't let the low profit percentage deceive you. Car dealers have high sales volumes, so 3.2 percent on $20 to $30 million is still a lot of money.

Beer, wine and liquor stores are also in the low profit range. They earn 3.4 percent profit. They have to sell a lot of beer and cigarettes at low gross profit margins to make a reasonable return. Gross profit margins on wine are better, but the inventory turnover is lower.

Furniture and home furnishing stores complete this low-margin list, with profits of 3.3 percent.

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