Why should you know the average profit margin by industry? Increasing your profit margin should be your ultimate goal as a business owner. Profit margin measures your business’ profitability and is a great indicator of your company’s financial health.
But even if you have calculated your own profit margin, it can be difficult to know if it is what it should be. What is a good profit margin? Should you get financing in the form of a business loan to increase your profit margin?
To answer those questions, first, you have to compare. By looking at the profit margin by industry, you can see how your business compares to others in the same sector. This information can help you determine whether or not your business is in good shape. It also shows you which industries are the most profitable.
What is Profit Margin?
Profit margin is a measure of any business profitability. It is calculated as a percentage of the revenue. It represents what percentage of sales has turned into profits. Simply put, the percentage indicates how many cents of profit the business has generated for each dollar of sale. For instance, if a business reports a 25% profit margin during last year, it means that it had a net income of $0.25 for each dollar of sales generated. There are several types of profit margin, but the term usually refers to the net profit margin.
What’s the difference between profit and profit margin?
Profit gets measured in dollars and cents, while the profit margin gets measured as a percentage.
What is a good profit margin?
As a general rule of thumb, a 10% net profit margin is considered average, a 20% margin is considered good, and a 5% margin is low. But you should note that what is considered a good margin varies widely by industry.
For example, in the construction industry, profit margins of 1.5% to 2% are normal. And according to an online poll in Building magazine, two thirds of respondents said margins were unlikely to reach 5% in the near future.
How do you calculate profit margin?
Divide net income by revenue. To make the margin a percentage, multiply the result by 100. Refer to the formula below to calculate first your net income, and then your net profit margin.
Now, let’s take a deep look at what profit margin is, what the average profit margin is the most common industries for small businesses, and how you can increase your business’ profit margin.
Types of Profit Margin
As we mentioned before, profit margin is a ratio that measures your business’ profitability. It tells you how much profit you made for every dollar earned from sales.
There are two main types of profit margin that you should be familiar with: net profit margin and gross profit margin.
- Net profit margin measures how much profit your business generated as a percentage of your total revenue. This is usually referred to as a company’s bottom line.
- Gross profit margin, on the other hand, measures the income left over after accounting for the Cost of Goods Sold (COGS). COGS refers to the expenses directly associated with product creation. Gross profit margin excludes overhead expenses like rent or utilities.
What Is a Good Profit Margin?
A “good” profit margin depends on a variety of factors. What industry is your company in? Are you a new company? What are your long-term goals?
These factors can all impact your ideal profit margin. One of the best ways to determine your profit margin goals is to look at profit margin by industry.
Restaurants, for example, should aim for a profit margin of about 6-9%. Construction industry is about 5%. Other business sectors may hover around 40%.
While most people would assume that small businesses have lower profit margins, that’s typically not the case. While small businesses tend to have lower sales figures, they also tend to have fewer employees and lower expenses, which contributes to higher profit margins.
What Does Profit Margin Depend On?
Your company’s ideal profit margins depend largely on three factors: industry, expansion goals, and size.
Profit margin by industry is an important factor to consider when setting goals for your business.
Companies in the restaurant and foodservice industry, for example, typically have lower profit margins due to greater expenses.
Other industries may tend to have higher profit margins due to having lower expenses. For example, a business consultant would likely have a very high-profit margin due to low overhead expenses.
If businesses in your industry tend to have low-profit margins, that doesn’t mean you should change industries. Profit margin doesn’t measure how much money your business makes, it measures the percentage of your revenue that turns into profit.
You should also consider your future goals for expansion.
If you are planning to expand, then you will need to increase your profits and cash flow to fund your new business ventures.
However, if you don’t currently plan to expand your company, you might be focused on maintaining a healthy profit margin rather than increasing your profit and revenue.
The size of your company is also a very important factor when determining your ideal profit margin.
As mentioned, smaller businesses often have larger profit margins due to having lower expenses. This, of course, doesn’t mean small businesses make more money than larger companies. It just means that a larger portion of their revenue turns into profit.
As your business grows, it will likely add expenses like hiring new employees and purchasing equipment. These expenses can reduce your profit margin if you don’t increase accordingly your sales and revenue.
Profit Margin by Industry
Here are the average profit margins for some of the most common industries among small business owners in the United States:
|Industry||Net Profit Margin||Gross Profit Margin|
|Auto Repair & Maintenance||12%||21%|
|Hotels & Hospitality||8%||76%|
Keep in mind that these are the profit margins for 2018. Because of the coronavirus pandemic, profit margins in 2020 have been affected and have been reduced drastically in most industries.
COVID-19 and Profit Margin by Industry
As you would expect, COVID-19 has had a significant effect on practically every sector. Here’s a quick review of how the pandemic has changed profit margins in different industries:
Auto Repair & Maintenance
The auto industry has taken a beating in recent months. Car sales nosedived in March and April as stay-at-home orders came into effect. According to data provided by J.D. Power, new car sales saw a fall of 45% in April compared to the previous year.
The lockdown had other effects, too. The number of traffic accidents fell sharply, and accident-claim rates plummeted to a 50-year low. While this is great news, this had a direct effect on the auto repair industry. Data from CSIMarket reveal that the automotive aftermarket sector’s net margin fell to 2.45% in the second quarter of 2020.
COVID-19 has had a dual impact on the construction industry.
On the positive side, some costs, like energy, are down. But this benefit has been more than offset by the fall in demand.
Dodge Data & Analytics, a firm that provides software-based workflow integration solutions for the construction industry, estimates that commercial construction will be down by 16% in 2020.
What effect has this had on profit margins?
Net margins in the industry stand at a respectable 6.24%. Lower business volumes have likely been compensated for by the decrease in costs.
Hotels & Hospitality
The hotel industry has been hit hard by COVID-19. Health concerns and stay-at-home orders have resulted in a steep fall in demand. The extent of the impact on hotel revenues can be gauged by this illustration that shows the monthly average revenue per available room of United States hotels from 2011 to 2020.
Monthly average revenue per available room of United States hotels from 2011 to 2020
The falling revenues have resulted in net margins in the industry turning negative.
Companies providing property maintenance services have had to adapt to the changes brought about by the coronavirus.
They need to ensure that the highest standards of hygiene are maintained at client sites. Consequently, costs have gone up. There’s an increased level of expenditure on face masks, hand sanitizers, hand-wash, and disinfectants.
The higher level of expenditure by facility management companies will likely have an impact on their profitability. However, if they can renegotiate their contracts, they could increase margins back to their original level.
COVID-19 has had a massive impact on the profitability of the restaurant industry. In April, almost 5.5 million chefs, waiters, and other restaurant staff were out of work. Although there has been a partial recovery since then, the sector is still in trouble.
Pre-COVID, restaurants were making net margins of about 15%. Today many of them are making losses.
Operating income in the retail sector fell by 58% in the first quarter of this year, according to the research firm, Retail Metrics. The performance is even worse at -71% if Walmart’s figures are excluded. The giant corporation was allowed to operate to permit consumers to purchase essentials.
The tax services industry is seasonal, with demand spiking in the four months leading up to the tax filing deadline of April 15. This year, taxpayers were given an extension of four months — the last date was pushed back to July 15.
The net margins in the industry are in the region of 20%. They should remain largely unaffected by the pandemic.
COVID-19 has had a mixed effect on the transportation sector. A McKinsey report points out that trucking volumes increased by as much as 30% in early 2020 as consumers rushed to stores to stock up on essentials. Subsequently, the demand for transportation fell before rising again.
The industry’s net margins have risen from 1.4% in the second quarter of 2019 to 2.24% in Q2 2020.
Do You Need Adjustments to Match the Ideal Profit Margin?
If your profit margin doesn’t match the average profit margin of other businesses in your industry according to the table above, you may need to start taking steps to increase your profit margin.
Some methods you can use to boost your profit margin include:
- Apply for financing: Applying for a business loan can help you get the funding you need to pursue new business initiatives. This is one of the most recommendable ways to address those areas in your company that can increase your profit margin. The funds provided by a business loan can help you increase your inventory, hire staff, or implement marketing strategies that will set you apart from your competitors.
- Cut expenses: Every penny counts. Cutting unnecessary expenses, no matter how small, will help you boost your profit margin.
- Revise your prices: Changing your pricing can help you boost sales on certain products or services.
- Revise your business plan: Revising your business plan can help you identify ways to cut expenses and boost sales.
- Improve your bookkeeping practices: Improving your bookkeeping practices can help you save money in order to maximize your profits. Consider getting an internal audit to help review your bookkeeping practices.
By following a few of these steps, you can start increasing your profit margin today to match the average profit margin in your industry.
Are You Ready to Increase Your Profit Margin? Camino Financial Can Help
Business loans are a great resource for businesses that need funding to pursue new business ventures. This funding can be used to:
- Create and implement new marketing strategies
- Purchase new equipment
- Purchase real estate
- Increase manufacturing
- Hire new employees
- Increase cash flow
- And much more
At Camino Financial, we work with business owners from a variety of industries to help them get the funding they need to grow.
Our business loans are easy to qualify for, offer flexible loan limits, favorable loan terms, and a number of other benefits. With our business loans, you can invest in your business to start increasing your profit margins as quickly as possible.
We invite you to use our business loan calculator to see for yourself how our loan terms and repayment plans can help you grow your business.
If you’re ready to start growing your business, we encourage you to request a loan quote: it’s free, it won’t impact your credit score, and you’ll know instantly if you prequalify for a business loan.