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scenario could result from, prices that are too low, or excessively high costs of goods sold or operating
expenses. Low margins are determined relative to your industry and historical context within your
company.
Companies track three different profit margins: gross margin, operating margin and net margin. At each
level of your company's income statement, you divided a particular profit level by revenue during the
period to determine margin. Gross margin, for instance, is gross profit divided by revenue.
Gross profit equals revenue minus COGS, or variable costs. A starting point for low margins is low price
points. If your business doesn't charge what goods are worth, you miss out on additional revenue
opportunities. Charging $9.99 for an item that cost you $6 offers limited gross margin relative to
charging $12.99 for that same item.
Negative Impacts
In some cases, low profit margins align with a company's efforts to aggressively grow
market share. You may sacrifice short-term profit to generate traffic. However, low
margins that aren't part of a strategy mean you aren't creating strong profit from your
business activities and revenue. Without margin improvements, your business
may struggle to keep up with debts and expenses, invest in expansion and
distribution income to owners.