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 an excellent indicator of your company’s financial health.
But even if you have calculated your profit margin, it can be challenging to know if it is what it should be. What is a good profit margin? Should you get financing to increase your profit margin?
To answer those questions, first, you have to compare. By looking at the average 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 the most profitable industries. Learn about the food industry profit margin, construction, retail, and more.
Average Net and Gross Profit Margin by Industry
Here is the average profit margin by industry among small business owners in the United States, including food industry profit margin, construction, retail, and more.
|Industry||Net Profit Margin||Gross Profit Margin|
|Auto Repair & Maintenance||12%||21%|
|Hotels & Hospitality||8%||76%|
|Food / Restaurants||15%||67%|
These are the average profit margin by industry for 2018. However, because of the coronavirus pandemic, the average profit margin by industry in 2020 and 2021 has been affected drastically. And while all industries are recovering, it might still take a while to get back to the average profit margin by industry. Some industries have chosen microfinancing to boost their businesses while enhancing inventory or other needs they may have.
COVID-19 and the Average Business Profit Margin by Industry
As you would expect, COVID-19 has had a significant effect on practically every sector. The typical gross profit margin by industry and the typical net profit margin by industry have changed because of the pandemic.
So here’s a quick review of how the pandemic changed the average profit margin by industry:
Auto Repair & Maintenance
Car sales nosedived in 2020 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.
Thanks to the lockdown, the number of traffic accidents fell sharply, and accident-claim rates plummeted to a 50-year low. While this is great news, it affected the auto repair industry. Data from CSIMarket reveal that the automotive aftermarket sector’s net margin fell to 2.45% in 2Q2020.
COVID-19 had a dual impact on the average profit margin by industry (for construction).
On the positive side, costs like energy went down. But this was offset by the fall in demand.
Dodge Data & Analytics, a firm that provides software-based workflow integration solutions for the construction industry, estimated that commercial construction was down by 16% in 2020.
What effect has this had on profit margins?
Net margins in the industry stand at a respectable 6.24%. The decrease in costs has likely compensated for lower business volumes.
Hotels & Hospitality
Health concerns and stay-at-home orders damaged the hotel industry because of 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.
The falling revenues resulted in net margins in the industry turning negative.
Maintenance services companies had to ensure the highest hygiene standards at client sites. Consequently, costs went up. There was an increased level of expenditure on face masks, hand sanitizers, hand-wash, and disinfectants.
The higher level of expenditure by facility management companies had an impact on their profitability.
Food industry profit margin
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.
Pre-COVID, full-service restaurants were making net margins of about 15%. However, during the pandemic, many of them were making losses. It is important to consider the food costs in this calculation. Restaurant owners need to consider all the variables carefully for the equation of profit margin. This applies for all types of restaurants including quick-service restaurants.
According to the research firm, Retail Metrics, operating income in the retail sector fell by 58% in the 1Q2020. The performance was even worse at -71% if we exclude Walmart’s figures. This is because 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. During 2020, taxpayers had an extension of four months — the last date was pushed back to July 15.
The net margins in the industry are were in the region of 20%.
COVID-19 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 2Q2019 to 2.24% in Q2 2020.
What Does Profit Margin Depend On?
Your company’s ideal profit margins depend primarily on three factors: different industries, expansion goals, and size.
Knowing the average profit margin by industry is essential when setting goals for your business.
Companies in the restaurant and foodservice industry, for example, typically have lower profit margins than other businesses due to greater expenses.
Or 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 operational expenses.
If the average profit margin by industry in your line of work tends to be low, 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.
If you plan to expand, 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 crucial factor when determining your ideal profit margin.
Smaller businesses often have larger profit margins due to having lower expenses. This doesn’t mean small businesses make more money than larger companies. It just means that a more significant portion of their revenue turns into profit.
As your business grows, hiring new employees and purchasing equipment will be expenses that can reduce your profit margin if you don’t increase your sales and revenue.
Do You Need Adjustments to Match the Average Profit Margin by Industry?
If your business’ profit margin doesn’t match the average profit margin by industry, according to the table above, you may need to start taking steps to increase your profit margin.
By following a few of these steps, you can start increasing your profit margin today to match the average profit margin in your industry.
Some methods you can use to boost your profit margin include:
- Cut expenses: Every penny counts. Reducing production costs, no matter how small, will help you boost your profit margin.
- Revise your prices: Changing your pricing can help you boost sales on specific 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 to maximize your profits. Consider getting an internal audit to help review your bookkeeping practices.
- 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.
What is Profit Margin?
Profit margin is a measure of business profitability. 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 company reported a 25% profit margin last year, 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 good, and a 5% margin is low. But you should note that what exactly is a good margin varies widely by industry.
For example, in the construction industry, profit margins of 1.5% to 2% are standard. 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?
Here’s how to 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.
As you can see by the formulas above, to calculate your net income, you need to subtract, from your revenue, the cost of goods sold, operating expenses, interest, taxes, and other expenses.
Now, let’s take a deep look at the profit margin, the average profit margin for the most common industries, and how you can increase your business’ profit.
Types of Profit Margin
As we mentioned before, the 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 also called a company’s bottom line.
- On the other hand, gross profit margin 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. Thus, the gross profit margin reveals how efficient your operations are.
- There’s also operating profit and pre-tax profit margin.
Learn more about all the different types of profit.
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 the average profit margin by industry.
Restaurants, for example, should aim for a profit margin of about 6-9%. The construction industry profit margin is about 5%. Other business sectors may have higher margins
Don’t compare your average profit margins to another business’ unless they’re in your same industry and during the same period (it’s not the same to compare margins during a recession with margins during stable economic times).
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, contributing to higher profit margins.
What is a Good Profit Margin for a Service Business?
An average net profit margin of 5% to 10% can be considered average.
Are You Ready to Increase Your Profit Margin? Camino Financial Can Help
Small 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 (social media for example)
- Purchase new equipment
- Purchase real estate
- Increase manufacturing
- Hire new employees
- Increase cash flow
- And much more
Are your margins not up to par with the average profit margin by industry? Business loans are a great resource to make investments that can strengthen a business.
At Camino Financial, we work with business owners from a variety of industries to help them get to the average profit margin by industry they need to beat industry competitors.
Our business loans are easy to qualify for, offer flexible loan limits, favorable loan terms, and many 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 apply for a loan: it won’t impact your credit score, and you’ll know if you prequalify for a business loan instantly.Apply now!