High profit margin means that you make a high amount of money on an item compared its cost. By contract, low profit margin indicates that you make a low amount of money compared to an item’s cost. For example, imagine that you own a small software company that develops and sells technical software for which customers pay a lot of money. If the cost to produce the software is relatively low, you probably have a high profit margin. Though there are exceptions, luxury retail stores typically have a high profit margin, whereas dollar stores have a low profit margin. Profit margin usually refers to net profit margin, meaning the amount of money earned on each unit sold after you subtract all expenses. When you’re starting a business, it’s important to understand that its potential high profit margin doesn’t tell the whole story; you have to take all expenses into account to get a real sense of whether a seemingly high-profit-margin business idea will make money. For example, jewellery typically is considered a high-profit-margin business, but if you’re opening a jewellery store at a mall, your actual profit margin could be low if you have to pay for pricey mall rents and hire full-time employees. Knowing whether an item has a high profit margin is a good place to start, but take expenses such as production and marketing costs into consideration as well.
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