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Profit Margin

Be careful not to get confused between profit and profit margin. The profit margin of any item is the difference between the selling price and the cost of producing it.

Petrol retailing might not be as profitable as you might think. © Ove Tøpfer, Stock.Xchng

Using our example on the previous page, the profit margin to the newsagent of selling the Sun is the difference between the price they charge their customers (25p) and the cost of buying it from the newsagent (10p). In this example, the profit margin is 15p or 60% (the profit - 15p, divided by the price or revenue - 25p, x 100)

You may have heard mention in the news of firms who are experiencing 'tight margins' or having their 'profit margin squeezed'. This jargon refers to what is happening to the difference between the selling price and the cost. If costs are rising but the price stays the same then the profit margin will be smaller. If the business decides to cut its price but costs stay the same then again, it will face a smaller profit margin.

In our example, if the newsagent is told by the distributor that the cost of buying the Sun from them is going to rise from 10p to 12p per copy, then the profit margin will get smaller assuming he decides to keep the price he charges his customers the same.

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