What is a benchmark for good profitability?
It's a question every business owner asks, yet it can be hard to define.
What is Good Profitability?
Good profitability depends on various factors, such as the industry, business model, and stage of growth Generally speaking.
A good level of profitability means that your revenue covers all operating costs (including salaries) with some margin left over to reinvest in future growth.
For early-stage startups or SaaS companies, investing heavily in R&D or customer acquisition strategies for long-term succesacrificing short term profits - which are essential at later stages.
If you run a mature company where sales have stabilized, being profitable will be more important than chasing high-growth rates.
In summary, sustainable profit margins vary between industries, so it's difficult to provide general rules, but one thing must remain constant: never accumulate indefinitely without reassessing and adjusting accordingly.
Here some some general rules of thumb from scaling up by Verne Harnish:
At 5% pretax profit, your business is on life support.
At 10% pretax profit, the business is doing well, but has some untapped potential.
At 15% pretax profit, the business is in great shape.
Anything above 15% indicates that you should earn it while you can.
The market will figure out what’s going on, competition will show up, and you will eventually get pushed back.
I wrote 32 issues on business models to sustain this privilege in my newsletter, The Business Builder. Check it out here: businessbuilder.beehiiv.com/subscribe