I recently read an article about what the average person believes to be the average company’s net margin. The number was shocking, and it demonstrates just how little people really understand about business. The average number was 36 percent.
The 36 percent was not gross margin, mind you. It was net margin, the money left over after you take out costs of goods sold and operating costs. The actual number is 6 percent, making the estimate off by 600 percent. Wal-mart has a net margin of 2.1 percent. Apple’s net margin is around 21 percent.
Wal-mart is an extremely successful company, and they keep a lousy 2 pennies out of every dollar you spend with them—and they give you the lowest price. Apple, on the other hand, has no interest in the lowest price model, and for the business model purity, they keep about 22 pennies out of every dollar you spend with them.
If you have a 6 percent net margin, the price concession you make comes off the 6 pennies you keep out of every dollar of revenue you generate. This is true if you have 2 percent margin or a 22 percent margin.
If you are asked for a discount, and you no doubt will be, keep in mind that the person asking you to do better on your price has no idea how much you net for providing them the goods or services you supply them. It’s likely that they believe you have much higher margins than you actually yield after paying all the bills.
Your belief as to what you should be able to keep is also a decision about the value you believe you create. Apple could, should it decide to, try to operate at 6 percent net margin, lowering the price of their products and capturing greater market share. But that isn’t their business model, it’s not their strategy.
If you can net 6 percent you can net 7 percent. You have to be able to defend your right to claim an additional penny of each dollar of revenue. Most people will look at their costs to save the additional penny instead of trying to create enough additional value to be able to command an extra penny.
Are you willing to argue for a penny with people who believe you are starting with 36 pennies out of every dollar?
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Filed under: Business Acumen