What is Low Profit Margin?

by Craig Anthony

1 min read

Profit margin is the amount of revenue left after paying for the expenses of a product or service. A low profit margin indicates the selling price of a good isn’t substantially higher than its cost. Companies with low profit margins are in competitive industries, offering products that aren’t highly unique. These companies must be efficient in terms of their overhead spending to keep their net incomes positive. Companies with low profit margins have low margins of error, because there isn’t much revenue to cover mistakes. A low profit margin may also indicate that a business is operating inefficiently. For example, one company may require more fabric to make a dress than another company would need. This results in higher direct material expenses and less money remaining after the dress has sold. Another inefficiency may relate to labor; if it takes twice as long to make the dress, the company has to recoup twice as much labor expense. In general, industries involving food – especially restaurants – typically have lower margins. The revenue has to cover the costs of the food, meal preparation, and service. Retirement communities and assisted living locations have a low profit margin because of large overhead requirements. In addition, stores selling office supplies typically cannot charge higher margins, because goods are easily replicated throughout the market.

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