Factual Friday: Why High Profit Margins Matter for Service-Based Businesses
Profit margins are one of the most important financial metrics for any business. In service-based businesses, margins typically range from 15% to 30%, but some industries—like consulting and coaching—can achieve margins as high as 70-80%.
Unlike product-based businesses, which deal with manufacturing, inventory, and shipping costs, service-based businesses often have lower overhead expenses. However, without proper pricing and expense management, your margins can shrink quickly, leaving you working hard without seeing the financial rewards.
Why You Should Strive for High Profit Margins
Regardless of your industry, your goal should always be to maximize your margins. A higher margin means more profit per dollar earned, allowing you to reinvest in your business, save for taxes, and build long-term financial stability.
💡 Example: A freelance consultant charges $5,000 for a business strategy session. Since their main costs are software subscriptions, marketing, and some administrative expenses, their total expenses for the session might be only $1,000. This leaves them with a profit margin of 80%, or $4,000 in profit.
Now, compare that to a cleaning business that charges $5,000 in monthly services but has $3,500 in expenses for supplies, labor, and transportation. Their profit margin is only 30%, or $1,500 in profit. While both businesses generate the same revenue, the consultant keeps far more of their earnings.
This is why service providers must track expenses and set profitable pricing structures to ensure they are maximizing their income.
How to Calculate Your Profit Margin
To calculate your profit margin, use this simple formula:
(Revenue - Expenses) ÷ Revenue × 100 = Profit Margin (%)
If your margin is below 15%, you may be underpricing your services or overspending on expenses.
Want Help Improving Your Margins?
Join the DBR Bookkeeping Online Community HERE to learn how to price your services for maximum profitability.
📅 Need personalized guidance? Schedule a free call with Dr. Bryan Raya for expert bookkeeping and financial advice.
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