marketingI’ve read that 11% is the average profit margin for businesses and that most linger between 10-20.
However one of my teachers recommended 50% profit margin for an online service that I’m building.
I’ve read that 11% is the average profit margin for businesses and that most linger between 10-20.
That’s dubious if not unlikely.
First, which profit margin? Net? Gross? Before you factor in amortizations? What about non-variable costs like rent or the CFO’s department? Etc.
Next, the figures that people in economics and finance usually look at are those in things like filings and tax returns, where accounting wizardry can turn a profit into a loss or vice-versa. So view these figures with lots of suspicion.
Last, this is an average. If you’ve a Bill Gates and two random people in a room, their average yearly income will be out of whack compared to the median, which might be closer to a few tens of thousands. So thread carefully when looking at averages.
one of my teachers recommended 50% profit margin for an online service
That’s a reasonable ballpark if you’re a retail business selling stuff you purchase elsewhere. If you buy plastic toys at X, you then try to sell at 1.5-2X to cover things like rent, storage, theft, etc. It also works when you’re selling engineer time - hire for X, sell at 1.5-2X to cover downtime, office space, and so forth.
It flies out the window for software products. Your costs are then almost all salaries and lump sums like infrastructure (hosting, etc.) that can’t easily be broken down to a fixed cost per unit sold.
For software products what you need to figure out is what type of value you’re providing to your end users, and what they’re willing to pay in return for this value. The way to do that is to talk to them. (A few pointers on what to ask here.) You can also use what your competitors are charging as hints, but be mindful that they usually haven’t spoken much to their clients before setting their prices.
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