MBA2459 Q&A Wednesday: What should my margins be? How do I improve them over time?

0:09Heyo! Welcome to the$100 MBA show, the place to be to build a business you want with our practical business lessons. I'm your host, your coach, your teacher, Omar Zinhome. And today's episode is Q &A Wednesday, where we answer a question from one of you, one of our listeners. If you've got a question you want to ask, go ahead and email me over at omar at 100mba.net. Today's question is from Josh. And Josh asks, Hey, Omar, I hear you on the podcast talk about margins and how important having healthy margins are. I run an e-commerce business, iPhone accessories, and I'm not really sure what my margins should be.

0:46And if they're not right, how do I improve them? Thanks for all the great content, Josh. Love this question, Josh. Thanks so much for asking this question because it's true. I talk about margins all the time because I know how hard business could be when your margins are thin. I've lived that life. It's not fun. It actually makes your business a whole lot harder. It prevents you from growing or growing even at a normal pace, let alone a fast pace. It causes you a lot of stress. It causes a lot of problems within your company. It doesn't allow for you to reward your best team members with raises and bonuses.

1:21It doesn't allow yourself to reward yourself with some dividends. But Josh is right. It's good to know what's a healthy margin. What should he aim for in his e-commerce business selling iPhone accessories? Well, we're going to get into all that in today's episode. I'm going to talk about how you can analyze your margins, how to have a game plan to improve them and increase them without upsetting your customers. In fact, you're going to do the opposite, but also how to think a little bit bigger about this topic so that you have a game plan, not just for right now, but for years ahead. Let's get into it.

1:51Let's get down to business. When I talk about margins, I'm talking about how much money you make between your gross costs and your gross revenue. When people have margins of like 5 % and 10%, it doesn't really allow for any wiggle room or even room for discounts for your customers. So how large should your margins be? My answer to this question is always as large as possible. The bigger, the better. And I say this to expand your mind a little bit. Don't think about, oh, if I raise my prices by 10%, I can increase my margins by like this. If I lower my costs here, maybe I can increase my margins there.

2:25No, that's not the kind of margins we're looking for or margin increase we're looking for. We want to drastically improve your margins, 2x, 3x, 4x your margins. This might mean slowly changing the perception of your brand to being more of a higher end brand, a higher quality brand. A good example of this is Apple. Even though Apple is selling physical products, it's e-commerce, just like Josh, they built in a lot of margin. Some of their iPhones make 50 to 60 percent margins, which is huge for a physical product. And yet people are lining up to buy their phones. they don't think they're expensive.

3:05They think that they're reasonably priced given the value they're getting. A little computer in their pocket, the amount of things they can do with their phone, the cameras, watching movies, the apps, everything that you can imagine that you love about your phone. They're even higher on products like AirPods and accessories. But Apple would not be able to do this if they were seen as the value brand, the low and inexpensive brand. No, they're seen as the premium brand. When people buy an Apple computer, they're expecting to buy premium quality. And often the price allows them to perceive it as premium quality.

3:42Again, the price is often the reason why they think it's premium, because it's expensive. I talked about this study before. It's been quoted in a lot of books and a lot of marketing material. But there was a study done where they had three bottles of wine. One bottle of wine was marked as an inexpensive wine. a certain dollar amount, let's say$10. The next one is middle tier, so it was about$25. And the expensive wine was about$50 a bottle, and they marked the bottles accordingly. They asked the participants of the study to take a taste of each of the wines. And as they tasted each wine, they said, yep, the most expensive one tastes the best.

4:22It's the best quality wine. And the middle one is somewhere in between. And the low cost one tastes low cost. You get what you pay for is what they said. The crazy thing is the study revealed that all the wines were exactly the same. It was the same wine. It's just the labeling on the bottle and the price point that they actually prescribed to the bottle was different. So people actually enjoyed and felt like the product would taste better. Their mind and their body told them it tastes better because it's expensive. If this is not a convincing argument for you to go premium to increase your profit margins, then I don't know what it is.

4:59This is pure science. So this is really the most effective way to increase your margins is to go up market. This is applicable to any kind of business, whether it's a service-based business, a experience business, entertainment, courses, coaching, software. It doesn't really matter. Your job though, is if you go up market, is that you give them the experience that it is up market. Has to be objectively premium. And this is how you really change the game in your business to increase your margins. Now, when it comes to making more profit with your margins, you're able to reinvest in your business and it becomes this flywheel where you can actually increase your margins beyond where it already is.

5:41So let me give you an example to explain. Let's say I run a very small software company, okay? And I sell the software to businesses and I have a premium software for a premium audience and I have high prices. My margins are quite high, but my costs are kind of fixed because I got to pay, you know, server costs, the usage of that server. And that can be a little bit costly because right now, maybe I don't have a lot of customers and I got to pay a fixed fee. But as I make more revenue, because my margins are large, I now have some profit that I can reinvest in my business. I can then hire an IT expert, a system administrator who can build out my own custom servers and allow me to spend less money on a regular basis, on a monthly annual basis than using a service.

6:27And now I'm serving my customers even better in my own private server network to run my software. I'm paying less for that. And I'm gonna continue to get that healthy margin. And now it's even healthier because I'm paying less to deliver the service, to deliver the software. This is why margins are so important because you can then take the profits and reinvest in your business and lower your costs to then again, increase the profits. And this is what happens in any business. So Josh has an e-commerce store. He has to buy product. He has to buy materials to build his iPhone accessories or to resell them.

7:02But as he increases his margins, he can probably get a better discount if he buys more product in bulk, more materials. He probably can save some money if he then invests in a long-term contract in a warehouse to store his product. Again, lowering his expenses to increase his margins. So let's get really actionable. What can Josh do right now to increase his margins? Number one, know where your margins are right now. Take a look. And you asked, what is a good rate for your margins? Well, I just quoted Apple 50, 60%. That's incredible. That's something you should aim for. The bare minimum for e-commerce should be 10%.

7:42That's your gross profit margin. That's still dangerous in my opinion. I would not want to get close to that. You want to be somewhere healthy around 15, 20%. That's kind of like, okay, a baseline, I would say 15 to 20%. You should aim to the 30, 40, 50, 60, even 70, 80 % profit margin. You can do it if you position yourself properly, have the right branding, have the great experience for your customer. Everything around the product is as good as the product. So the first thing you do is find out where you're at right now. What's your profit margin? How much does it cost you to create the product and give it to the customer, deliver the product to them?

8:18How much money do you make for that product? What's the difference? What's the percentage? Once you've established that, now you know where you're at and you know you have some milestones to hit, whether it's 15%, 20%, 25, 30, 40, 50. And put yourself on a timeline because you're going to need to do some things to hit those goals. I like to do timelines of quarters, so quarters of the year, so three months. So let's say you're at 15%. You say, I want to get the 20 % by Q2 or in the next three months. This gives you some direction. This gives you a clear goal so that you know, okay, this is the outcome I'm looking for.

8:51Second, a lot of people say lower your expenses. I say first, figure out how you can increase your price. The fastest, easiest, most pleasant way for your customers to increase your prices is to increase your value. If you offer something better, something higher quality, even if it's just a new product, a new product line that's premium, and that eventually over the years that becomes the only product line or the only level of product line. That's a good way to start. Create something that is worth more money. You see, the thing is that when you start going upscale, the difference between certain price points starts to get wider.

9:29I'll give you an example. I'm shopping for a new standing desk for my office. I'm doing a little bit of remodeling for my studio and you can get a standing desk for$400,$300 even. This is a low end, cheaper end. But once you start going premium, we're talking about starting at$1 ,000 and it goes up to$1 ,500,$1 ,800,$2 ,000,$3 ,000. The jumps become more significant and it actually doesn't matter too much because somebody who's ready to invest, let's say$1 ,200 on a desk is willing to maybe go to$1 ,500 or$1 ,600 on a desk. Someone who's willing to invest$1 ,200 on a desk is maybe gonna stretch to$1 ,500,$1 ,600.

10:09They're willing to do that. But for you as a business, that's a huge difference in profit margin, especially at scale for each customer. So when you go premium, there's a lot more elasticity to how much people are willing to pay. So start offering more premium products at a higher price point, a price point that makes you feel uncomfortable because a lot of us think, oh, I wouldn't buy that. But you're not the customer. There's a lot of people out there that have money to spend and are happy to spend it if they're getting something quality and the experience of buying it is quality. Next step, look at areas of how you can actually improve the experience for the customer while lowering your expenses.

10:46Like the server example I talked about with the software company. You may not be doing this right now, but start planning it so then you make the extra revenue from the premium products. You can reinvest in that. Maybe you have some redundancies already. Maybe there's some ways you can cut costs and improve the quality of your experience in the product for your customers. Examine that, the cost side and how you can improve it, how you can replace. I'm not just saying cut, but replace what you currently have with something just as good or if not better at a lower cost. This could be software automation.

11:16This could be hiring somebody to do it manually. This could be switching providers to somebody who is doing this better and at a lower price. Do some research. You might be surprised what you find out. Lastly, if you want to increase prices on products, look at the products that are bestsellers. These are products that people love and are willing to buy them even if they're a little bit more expensive. Look at your bestsellers, see if you can increase them by 10 to 15 % on price. Most of the time, that's not going to affect the buying decision and experiment. Pricing is an experiment. This is something I learned from my buddy, Patrick Campbell, who was a founder of ProfitWell, a company that sold for over$200 million dollars.

11:54But the whole goal of ProfitWell was helping people with their pricing and making more revenue. So I highly recommend you actually look up Patrick Campbell, look at his interviews. He was on here on the podcast. It's an extended interview. You want to search that on our site at 100mba.net or check out some of the articles, his e-books. They're really good. And it's going to make you start thinking about what pricing is all about, how to improve your pricing. You'll learn things like willingness to pay average revenue per customer, how to increase your prices without doing it the wrong way and disgruntling them.

12:28He's a master. Lastly, this is not a once and done thing. You want to incrementally improve your margins over the years with every product, with every service, with everything you offer your customers. The way I see it is that when you're starting out, you're just trying to make sure you're providing something that customers want. You have a viable business. You're making some money, making some profit. You have some traction. Once you get past that stage, now it's time to refine. Now it's time for you to start increasing the value you offer your customers, making them better products, better quality, a premium experience every single day.

13:02Thanks so much, Josh, for asking today's Q &A Wednesday's question. And thank you for listening to the podcast. If you love the show and you want to support it, drop us a rating and review. You can do this on Spotify or you can go on Apple Podcasts and drop us a written review as well as a star rating. I'd love to hear what you think of the show. Thanks so much in advance for doing that. It means so much to us. I read every single review because I love to hear what you guys love about the show. So I can continue to do that and continue to provide value for you, the listener. The most important person here on the podcast is you.

13:31So I want to hear from you. Thanks again. Before I go, I want to leave you with this. A business with healthy margins is just fun. It's easier. It's actually rewarding. You actually love going to work because it's rewarding. You're actually making money and healthy margins allow you to have a little bit of breathing room to be innovative and try new things and invest in your business and have nicer things for your employees, whether it's a retreat or a nicer office or perks, whatever it is. It just makes it a whole lot better. I've had businesses with thin margins. They're really hard to run. They're stressful.

14:06There is something I wouldn't recommend. So love this question from Josh today. so I highly encourage you to start enjoying your business with better margins. Thanks so much for listening and I'll check you in the next episode. I'll see you then. Take care.