- Passionate Income
- Posts
- Only Brokies Ignore Margins
1,046 Words | 4 Min 22 Sec Read
Welcome to another issue of Passionate Income.
Today we’ll be discussing the importance of understanding profit margins.
In particular, why you should pay special attention to average profit margins before understanding a business. We'll also discuss the math behind why margins have a direct impact on your take home profit (aka spending cash).
Let’s dive in.
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Want your business to put more spending cash in your pocket? If so, you might be going about it all wrong.
If you’re like most entrepreneurs, you see your disposable income as a math equation that is directly tied to how many sales you generate.
Whether you’re selling a product, service, or sponsorships for your faceless page, generally speaking, more sales equal more disposable income.
The problem with this thinking, however, is that top-line revenue is not the only factor that affects bottom-line profit.
Now, if you’re new to business, top-line revenue just means how much money your business brings in, which is usually determined by how many sales you make.
More importantly, bottom-line profit simply refers to how much is left over after all of your business expenses.
If you run micro-businesses as sole proprietors or single-member LLC owners, there’s a high likelihood that your income is almost 100% correlated to your business’s bottom-line profit.
In plain English: Whatever’s left over at the end of the month is how much you pay yourself.
Now, for larger businesses, you have to be more structured, and this type of simplicity would not be appropriate.
But for 99% of you, bottom-line profit equals pre-tax income.
So the question becomes: How can you put more disposable income in your checking account?
As we discussed earlier, generating more sales is one solution.
But it’s not the only one.
In fact, in many cases, trying to grow revenue is arguably the most difficult way for an entrepreneur to generate more disposable income.
Especially if you have an established business that’s already doing a decent amount of revenue.*
*On the flip side, if your business is brand new and you’re barely scraping by, you should 100% focus on generating more revenue.
But where the conversation around profit margins gets even more interesting is when you consider it in the context of deciding which type of business to start.
As an example, a lot of people are attracted to the agency model because the work can be outsourced to other people.
What they don’t consider is the fact that human labor is normally the largest expense most businesses spend money on.
In fact, on average, most agencies operate at an approximate 30% profit margin.
Meaning, for every $100,000 they generate per year (in top-line sales), $70,000 goes to expenses (leaving $30,000 in profit).
Taking this illustration further, that means that for every $1 million in sales the business generates, there’s only $300,000 left over at the end of the year.
Which breaks down to $25,000 per month in pre-tax income.
Sure, most people here would be ecstatic to earn $25,000 per month. The problem is the whole building a $1 million per year business part.
Now, imagine I told you that you could build a $360,000 per year business but still take home the same $300,000 in profit.
What sounds easier, building a $360,000 per year business, or building a $1M one?
Obviously, the $360,000 per year business would be much easier to build.
So what are the different types of profit margin you should expect for today’s most popular business models?
Below will break them down based on a couple of different ranges.
75% to 99%
Freelancing
Consulting
Coaching (organic mktg only)
Established SaaS companies
Faceless Pages
UGC Creator
Info Products (organic mktg only)
YouTuber / TikToker
50% to 74%
Coaching (ads + organic)
Info Products (ads + organic)
7-figure+ media company (includes content brands, faceless pages, etc)
Professional YouTuber / TikToker
Boutique Digital Agency
Boutique e-Commerce
25% to 49%
Most e-Commerce
Most agencies
Brick and mortar businesses
Startup SaaS (which usually run at negative return rates in the beginning)
As you can see here, regardless of what your income goals are, deciding to build an agency or e-commerce store could require you to build your business three times as large just to earn the same amount of income.
In fact, the difference between choosing a boutique agency versus a mainstream one could be responsible for you having to earn 50 to 100% more.
Admittedly, many of the business models at the top of this list cannot be sold as part of an acquisition (have no equity value).
And because of that, true-blood entrepreneurs do not see them as being 'legitimate businesses.'
With that said, if your goal is to make $5,000 or $10,000 per month, choosing one of the business models with higher profit margins will make your life dramatically easier.
Especially if you plan to work for the next few decades, and have no need for a large cash windfall (which, despite sounding nice, is not guaranteed even if you decide to build a traditional business).
In conclusion, profit margins have an outsized impact on the amount of disposable income that ends up in your checking account any given month.
Choose a business with high margins, and the majority of every dollar in sales you generate will go straight into your pocket (before taxes).
Choose the wrong model and you may need to generate 2X to 3X the amount of revenue just to earn the same amount of income.
💡 Takeaway: Using basic math, it's easy to see how a business with 80% margins generates 250% more disposable income than one with 30% margins. So before you go launching that agency or e-commerce store, make sure you've run the numbers re: how much take home income you'll earn.
🎁 Resources:
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