The average motorist stopping by a convenience store just doesn't have room in the car for an eight-gallon vat of soda. Balancing profitability against volume is the bailiwick of market researchers, promotion gurus, and hard-nosed corporate executives. All the sales volume in the world is meaningless to shareholders if the company cannot manage to turn a profit, though. So pricing a product to be as profitable as possible and generate stable sales growth is the Holy Grail of sales and marketing groups across the business world. The profit margin is one of the easiest ways to assess whether or not this group is meeting the test of the profitability side of the equation.
Profit margins are the money left over after paying all of the costs of running the business.
Managements that increase profit margins are controlling costs either by squeezing efficiencies out of the business or cutting out unprofitable ventures. Profit margins are also an expression of the amount of competition inherent in the business. Competitive industries like grocery stores or discount chains tend to have very low profit margins. This is because it does not take all that much to get into those businesses. A global brand like Coca-Cola with a massive distribution system to get its product to consumers in a variety of packages makes for one heck of a wall to climb for any new competitor.