51–60 of 130 posts
This article is very timely as I was just thinking about margins given that I run a couple small websites that use Amazon Affiliate marketing. The margin on most items is 4% (some lower, some higher e.g. luxury items are 10%). 4% is not terrible in and of itself. But then you factor in: - advertising costs - conversion rates on clicks from the above - taxes and you get a real appreciation for how hard it must be to r…
> Divide a company's income by its revenue If I'm a person who believes income is the same thing as revenue, how would you explain this division to me in a way I'd understand? Or does "income" in this case mean "profit"?
Revenue = The total value of goods or services a company sells during a particular accounting period.
Gross Margin = The difference between revenue and the cost of goods sold. Also called Gross Profit.
Net Income = A corporation’s net earnings or “bottom line.” Net income is the residual of revenues after cost of goods sold, operating expenses, depreciation, interest, and taxes are considered.
Operating Expense = Expenses incurred in conducting normal business operations. Operating expenses may include wages and salaries, employee benefits, administrative expenses, research and development costs, and other similar expenses.
This article is very timely as I was just thinking about margins given that I run a couple small websites that use Amazon Affiliate marketing. The margin on most items is 4% (some lower, some higher e.g. luxury items are 10%). 4% is not terrible in and of itself. But then you factor in: - advertising costs - conversion rates on clicks from the above - taxes and you get a real appreciation for how hard it must be to r…
> Divide a company's income by its revenue If I'm a person who believes income is the same thing as revenue, how would you explain this division to me in a way I'd understand? Or does "income" in this case mean "profit"?
Revenue is what you sell your product for. Income is what you sit with after all the expenses and taxes have been deducted from the retail price. Let's say you create some product, XYZ, which takes you exactly 5 hours to make. The materials to make the product costs you $50, the salary costs $100 ($20/hr * 5 hours), the shop costs (rent, utilities, etc.) costs roughly $5 pr product. And the things involved in selling…
These days it seems that 30%+ operating margins are what VCs and stock market are expecting now, which seems unsustainable. Software and similar businesses can easily do it because cost of manufacturing one more unit is close to zero, all the costs are primarily NRE. Not all business fit that model and but yet they all aspire to the same margins.
> Divide a company's income by its revenue If I'm a person who believes income is the same thing as revenue, how would you explain this division to me in a way I'd understand? Or does "income" in this case mean "profit"?
Revenue is what you sell your product for. Income is what you sit with after all the expenses and taxes have been deducted from the retail price. Let's say you create some product, XYZ, which takes you exactly 5 hours to make. The materials to make the product costs you $50, the salary costs $100 ($20/hr * 5 hours), the shop costs (rent, utilities, etc.) costs roughly $5 pr product. And the things involved in selling…
That’s the net income. That word is doing a job there!
> Your operating margins would be $45 / $250 = 18%
No, that’s the profit margin or net margin.
Earlier quoted context omitted.
It skews the other way just as often in my experience. That large clump at 10% has some wildly profitable businesses in it.
The comment you are responding to was "profitable but no cash flow" (due to non-cash deductions). I'm not clear what you mean by "the other way".
Would be interesting to see the historical trends for operating margins. These days it seems that 30%+ operating margins are what VCs and stock market are expecting now, which seems unsustainable. Software and similar businesses can easily do it because cost of manufacturing one more unit is close to zero, all the costs are primarily NRE. Not all business fit that model and but yet they all aspire to the same margins…
That's what private equity loves.
“Your margin is my opportunity” Absent a true monopoly or government protection high margin businesses are usually those most ripe for disruption. Someone eventually comes along and, for various reasons, is willing to make far lower margin and then the battle begins. Lots of sleepy high margin businesses out there just waiting to get picked off by a new entrant.
I think the "quasi-monopoly" segment is the best attack vector if you are willing to get your hands a bit dirty. Companies like Mastercard and Visa are the closest thing you'll get to an actual money printer.
The trick with starting these kinds of businesses is to find one customer (B2B) who is willing to do the crazy thing with you. Someone who is fed up with the current state of affairs in their domain. Ideally, someone who is already a customer of one of these vendors you seek to compete with.
If I wanted to build a payment network from scratch, I would partner with a bank and begin with existing payment rails (Jack Henry, etc.,). and layer value-add on top (custom fraud detection, rewards programs). Over time, issuance, merchant acquiring and other concerns could be discussed once the trust and value proposition has been proven out. This is a very long play.
The hardest part of breaking in is finding that first customer and making sure they're a good one. If you have a good partner, it really does feel like cheating by comparison. I've worked with banks who could get things out of vendors with a five minute phone call that we couldn't in a million years. Stack a few of these and it begins to look like you're on the correct side of the moat.