Margin! Margin! Margin! As a young entrepreneur I was fortunate enough to be taken under the wing of an astute old Irishman by the name of Seamus O’Rourke. I mention him in all my books, he was my first mentor. He taught me, among many other things, about margin. Prior to that I was clueless. I will now share a few things with you, that perhaps will stay with you for the next forty years! When you buy a product for $10 and double the price of it most people will immediately say that is 100% profit. That’s not quite right. When you add $10 on the price and then you eventually sell the product, what comes back to you is $20 – 50% was the cost price and only 50% was gross margin. Don’t forget out of the gross profit margin must come a proportion of your overheads, wages, salaries, rent, business rates and all other expenses. If you buy a product for $10 and add $5 (which many retailers do), when you sell it, you get $15 back, ergo $10 was the cost price and $5 was gross profit, so that is only 33% gross profit margin.
Seamus quickly moved the conversation along. When you buy a product and then sell it most people will say the gross profit (before you take out overheads) is the difference between the buying price and the selling price. Again, this is not quite true. Profit is the difference between buying price and the REPLACEMENT price. For example: you buy a small gold bar for $1000 and sell it for $1350 you may consider the profit was $350. BUT, if you then go to your supplier and he charges you $1350 for the new gold bar stock, your profit has been effectively wiped out. This is of particular concern in times of high inflation, recession and unstable economies and this one point alone is wiping thousands of businesses of the face of the earth! And on top of product price increases, don’t forget postage, utilities, fuel, salaries, rent, taxes have all seen massive hikes and those increases are eating into your margins – dramatically.
When I had my motorcycle shops in the early seventies, Seamus pointed out something that turned our lives around. He showed me that when we sold new motorcycles we made 17% profit, but on used motorcycles we made 117% profit so we stopped selling new motorcycles overnight and went from strength to financial strength. He then pointed out that when we broke up crashed motorcycles and sold off all the parts as used spares, we made 1117% profit. Needless to say, that’s what we concentrated on and ended up with the largest bike wreckers in the country. These days I urge young and old entrepreneurs alike, to concentrate on products and services that have huge margins.