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Steve_A's avatar

Are minimum net profit margins a good idea?

Asked by Steve_A (5120points) August 28th, 2010 from iPhone

It seems like it would help you avoid more risk but also miss out of possible opportunities. Many acutually, I believe.

What is your opinion?
Do you minimum? If so what is it?

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11 Answers

kelly's avatar

have not really heard of this defintion. Profits are good. The amount of profits is open to debate. If your question is about how to price a product or service you should always strive to make a profit of at least inflation and your tax rate so you are at least even for the day. To just make enough to cover your costs of labor, materials, insurance, rent etc. that is too risky as you can not always count on sales. The term “what the market will bear” is a time proven stance. and what the market will bear will vary over time, ie the housing market. good luck, long live capitalism.

iamthemob's avatar

Regardless of clarification, I believe it’s pretty much a truism that whenever you choose to avoid risk you are reducing opportunities. So by setting achievable benchmarks, if you need to make adjustments in order to reach them you’re going to need to reduce risk to ensure that guaranteed performance – and risk is risk because if it pays off, the rewards are often significantly greater than the initial investment.

However, I believe that Kelly and I are in the same boat regarding some needed clarification. Are you discussing a MNPM (as I’ll call it) from the perspective of investment or ownership and current strategies? There are some different issues to address, i believe, depending on which one it is.

iamthemob's avatar

As a note, if you ARE discussing investing, factoring a minimum net profit margin really doesn’t have any effect in terms of hedging your investment or decreasing the risk in certain situations. If you select the stock of a company that has consistently over the past several years surpassed any profit forecast (and generally doubled your set minimum during this period), this appears safe on the face (barring all other variables. The problem in this scenario is that the company in question doesn’t really have any competition, so the product it makes will pretty much sell to the max production capability or the max market demand (whichever comes first). Should a new company enter the market producing similar goods at similar values and similar prices, the formerly predictive minimum will probably break down.

So there are several clarifiying pieces of information. Let us know!

jaytkay's avatar

I have worked with two scenarios which could be described as minimum net profit margins.

1)
A wholesaler or manufacturer, controlling its retailers’ selling prices. Apple is a good example. Prices for MacBooks, iMacs, iPods, etc do not vary much.

2)
A retailer, controlling its own selling prices.

#1 seems borderline legal, I don’t understand how they do that. But when I worked for an Apple dealer I benefited and I liked it.

#2 seem like a natural, prudent practice.

iamthemob's avatar

@jaytkay

I think borderline legal is a good description. It sounds like what you’re talking about is vertical price control, which could bring up a whole lot of antitrust issues based on market share. For example, if you pretty much have one operating system, and the supplier won’t let it be installed on a device sold at less than X, you’re going to have a lawsuit cause the one industry is essentially price fixing the other. As long as retailers can still take or leave the manufacturers condition, the market will pretty much continue to seek efficiency.

actuallery's avatar

High Volume Sales > Low Net Profit

iamthemob's avatar

@actuallery

I’m slightly confused – can you elaborate on what that’s addressing?

actuallery's avatar

@iamthemob – attain more volume sales by reducing your net profit. If the profit is high, sales are more likely to be less.

actuallery's avatar

The problem with low net profit is that stock returnsd due to damages, warrantied or defaults can marginally affect the profit margin. sometimes a high profit margin is better to ffset the costs even though your volume sales is reduced.

Wholesalers distributing to chain stores have a low net profit whereas distributing to small operators is based on a higher profit where volume is minimal and repeat orders are less likely.

iamthemob's avatar

Okay, but that doesn’t necessarily mean that setting a minimum net profit margin is a bad thing…right?

actuallery's avatar

@iamthemob – Right! Just make sure that your costs are not more than your profits.

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