Profit Margin Expansion

DEFINITION of Profit margin expansion

Profit margin expansion in long-term reference, it is a measure of a company’s net profit margin in the latest reported quarter. And divided by profit margin in the fiscal year previous.

In short-term reference, a measure of a company’s net profit margin in the latest reported quarter divided by profit margin in the quarter immediately preceding.

WHAT IT IS IN ESSENCE

Your profit margin is a metric that should always be on your radar, and for good reason: it answers critical questions about your business, like whether or not you’re making money or if you’re pricing your products correctly.

Continuous margin expansion is possibly the best sign of growth in a business. And stock pickers simply salivate at such prospects.

Unfortunately, there is no magic cure. Improving profit margins requires major strategic changes to your business, but if you’re serious about becoming more profitable.

Margin expansion in isolation could mean nothing.

Analysts say investors should see whether such expansion is sustainable, and look at how other parameters are working for a business, before taking a call on a stock.

HOW TO USE

The most basic way to increase margins is to increase prices. If you’re currently earning a 15% gross margin, and you want to increase it to 25%, increase your bill rates by 10%.

Of course, this strategy may come at a big cost.

You’re going to lose clients. In fact, you’re likely to lose every client that’s unwilling to pay higher rates.

And unless your services are noticeably better than your competition, you will have a very hard time finding new clients.

The idea with this strategy is to become a shop. But a specialty firm, known for doing one thing very well.

If you’re constantly facing margin pressures, the problem may be your clients. Some companies will always be price buyers. Some only care about “commodity-level” service.

Others are able to choose from lots of seemingly identical staffing vendors, so low price wins.

And finally, some companies may be in industries that simply cannot afford to pay more for better quality or service.

The key to making this strategy is to refocus your sales and service efforts on companies that demand higher quality people and service.