Profit Margins (Tradecraft)

An article has been making the rounds online about a poll stating Americans think the average company has a 36% net profit margin, a number so grandiose that that it's five times reality. Granted, this is from the American Enterprise Institute, so it was probably written with the intent that I twirl my handlebar mustache and adjust my monocle as I declare to Buffy how the common people just don't understand us.

The net profit margin for retailers in the game trade is in the 5-8% range. Retail in general is in the 1-9% range, with gas stations at the bottom and jewelry stores at the top.

I've written about this a lot, from the $100 board game that buys me a cup of coffee to the $1 can of Coke (net profit of 7 cents).

A 36% profit margin is basically assuming we get half the price of an item, plus some hand waving to cover costs, hand waving that comes nowhere near to reality. The devil is in the hand waving. Believe me, my initial business plan looked a lot like this. I nailed my sales projections, but I had no freaking idea about various costs, the 100 different office supplies, and the price of simple things like electricity that's three times more expensive than what I pay at home (per square foot).

Why is this important? It demonstrates that business is more fragile, with a smaller margin of error than most people think. If my rent, wages or miscellaneous expenses go up 10%, that's an inconsequential amount with a 36% profit margin. I can suck it up, right? But if my net profits are in single digits, that may have just wiped out half my profits. The ignorant free market crusader might claim that's economic natural selection. But this type of data shows they fundamentally misread the ecosystem.

There's also an educational component to this. In grad school, one of my professors half joked that Buddhist-Christian dialogue existed to avoid the Christians killing the Buddhists. Hey, we're just like you! I believe there's a similar undercurrent going on in American business. As income inequality is perceived as caused by all business, big and small, some education avoids a torches and pitchforks scenario. I know from online discussions that I am perceived as the man just as much as some Chevron executive, even though I make a modest, middle class salary. When they're smashing windows and looting in Berkeley, they're not doing it based on a spreadsheet of whose been naughty and nice. We're all bourgeoisie in their Marxist fantasy.

When all business owners are in the same boat, we end up circling the wagons. When they make it clear it's them versus us, we're far less likely to want to get to the bottom of crony capitalism and corrupt tax law. We're too busy installing security shutters and investing in new camera systems. That's not a metaphor. That's actually what happens. In reality, we have none of the power they associate with business and all of the burden. The real "powers that be" designed it that way.