What profit margin should I target?

white british airways taking off the runway

Business owners ask me questions like this a lot – what should my margin be…what rate of sales growth should we be achieving…what return on capital should we target?

However this misses an important point.

Many of the metrics people talk about are relatively useless in the context of an individual business. That’s not what they were designed for.

The alphabet soup of GM, ROI, ROCE, ROIC, etc, etc were invented to make it easy for banks and investors to compare one company in a sector with another.

But this is irrelevant to most business owners because they’re not usually deciding whether to invest in their own business or in one of their competitors. They’re either going to invest in their own business or not at all.

So there’s only one answer to the question “what should metric X be”…and that’s “as good as possible, in the context of your business, operations and customer base”.

Here’s just one example.

Landing fees are a big cost to airlines. But the landing fees Ryanair pays at its out-of-the-way airports are a fraction of the landing fees British Airways pays to land a jumbo jet at London Heathrow.

That’s because one airline wants to keep their landing fees as low as possible, entirely consistent with their mission to fly people round Europe for pennies.

The other airline willingly incurs much higher landing fees because that gives them access to more affluent passengers who prioritise convenience and service over cost in their purchasing decisions.

So any comparison between the two is relatively meaningless. Yes, they’re both airlines, but in reality they’re each in a completely different business, trying to attract a completely different group of customers.

Stop comparing your business to other businesses. Decide what customers you want to serve and try to deliver as much value as possible to your chosen customers while making a for profit yourself.

Most of the time, comparing your business with your competitors won’t make your business more successful. They’re doing their thing their way. You should be doing your thing your way. The chances of that leading to the exact same performance metrics for you both is tiny.

Published by Alastair Thomson

Founder of Better Business Publishing Ltd. An experienced Chairman, CEO, CFO and Non-Executive Director for large multinationals across sectors such as advertising, manufacturing, financial services, utilities, printing, direct mail fulfilment, contact centres, professional membership bodies, education and training.

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