Low Margin versus High Margin

A high profit margin indicates that a company operates efficiently.

A company that operates at high profit margins typically will make fewer sales than a company operating at a low profit margin. Businesses commonly prefer this model because it does not rely on a large sales volume to make a profit. High-margin products sell for much more than the cost associated with acquiring and maintaining the product, and low sales volumes are usually sufficient to cover all expenses related to these products. However, the production of high profit margin items typically involves greater expense and takes longer than low-margin products.

On the other hand, a low profit margin typically indicates a highly competitive market or an ineffectively run business.

Low-margin products sell for close to the price it costs a company to acquire and maintain the product. In order to realize a profit on low-margin items, businesses need to keep prices competitive and sell a large volume of goods.