Low Margin Products vs. High Margin Products

by David Bullock

As I observe people looking to start a new business, too many times they shoot for the mass markets, commodity markets and no-margin markets.

They ignore the niche markets, low-volume, low-competition and high-margin markets.

Going back to my experience as a sales rep in the industrial equipment space… at any given time, I had only 10 to 15 customers with only three to five competitors. And in that seemingly small market, with seemingly no competition, over $100 million in sales was produced.

This very experience flies in this in the face of most of the business advice currently being doled out in the marketplace.

Money is not made in the commodity space unless you are able to produce large volumes of sales and transactions. To make significant earnings with a $10 profit margin will take a long time. However, leveraging $100 profit margin gives a business owner room to market. More importantly, larger profit margins allow the business owner room to make mistakes as offers are being tested in the marketplace.
 
Using that argument, if I were starting a business today, I would look for larger profit margins and the products that I sell, and not concern myself with the cost-to-gross earnings ratio.

For example, if I can buy for one dollar and make three dollars, that's a great return on investment.  I will also have a marketing budget built into the product. But if I can buy my product for $100 and sell it for $1,000, I have $900 to play with in terms of marketing, fulfillment and delivery of this product to the end user.

See the difference?

This distinction of profit margin is huge, and makes or breaks businesses every day.

Take this thinking and evaluate your business accordingly.  See just how much room you have in each sale for marketing and promotion. I believe that you'll be surprised with what you find as you look within your business.

 

Til Next Time,

David Bullock

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{ 24 comments… read them below or add one }

Hendry Lee June 26, 2008 at 5:53 am

Once people find about the high-margin niche, they are going to jump into the market in no time. How do you find marketing for low vs high margin products?

Which is harder? Are they exactly the same?

David Bullock June 26, 2008 at 12:34 pm

Hi Henry:

*How do you find marketing for low vs high margin products?

The sequence is the same. No more effort. Just more leverage. The high margin (high profit) products are more forgiving in terms in marketing budgets

*Which is harder?

Neither is hard. It is a matter of matching the offer with the market. All of it wil take time and expertise.

*Are they exactly the same?

Never exactly the same. Some transfers in technique. But again it is all about matching the offer, product and market. The best policy is to approach every market as new and not have any hard and fast fixed ideas. Otherwise, you may make mistakes based on your thinking and not market observation.

Hendry Lee June 27, 2008 at 8:24 am

Thanks David. I appreciate that.

Cindy King July 5, 2008 at 8:51 am

I enjoyed your post and stumbled it. One thing about your post that I notice is that the niche markets are too often seen as just in your own country. An American selling to an American. There is a big old world out there, loads of countries with loads of niche markets that are open for business. Russia is starting to spend big time and Central/South America is a primarily Spanish speaking area – translate your site and sell in Spanish (or Chinese, French or…).

I stopped by to tell you that I’ve just published your article on the most recent Marketer Review Blog Carnival. Come by to vote on the best post of the 31 posts this week. Use the social media of your choice to help get traffic back to your site.
Remember that Friday is our deadline for new articles, so mark this Friday on your calendar as the latest that you can get to Blog Carnival to submit for next week.

David Bullock July 5, 2008 at 9:41 am

Cindy,

Thanks for the stumble.

You make a great point. We in the US are very much in a fish bowl. Only a small percentage of the world speaks English as compared to the other languages. There is a wide world out there that is looking for good information.

The foreign markets are the true profit opportunities. I will look into the translation of the site. Thanks for the suggestion. I am in the mist of massive upgrades and this will be added to the list.

I will check out the Blog Carnival. Sounds interesting indeed.

Jeff August 18, 2008 at 7:41 pm

That is totally true. Despite what some people seem to think, there are still many tight niches with little or no competition, and to make it even better, most of these niches are for fairly expensive items.

That means more profits, and in this slowing economy, the rich still get richer, so it can mean more sales also.

Jeffs last blog post..Zenith

David Bullock August 19, 2008 at 3:08 am

@Jeff

I have always been a fan of going where the other guys are not paying attention. Couldn’t agree more.

Expensive is better for sure.

Solomon Neuhardt September 1, 2008 at 11:20 am

Hello David. Great post. How do I go about findin the niche markets, low-volume, low-competition and high-margin markets? Thanks

Rhydian Hughes November 23, 2008 at 5:52 pm

Hello everyone. I`m doing some fishing, trying to find high margin products can anyone here help me with where I can get these products.
I would be so thankfull if anyone could help me.

David Bullock November 26, 2008 at 11:45 pm

The biggest high margin products are information based: Consulting, Training and IP fall into that category. The buyer is not buying the cost of the paper, ink and printing. They are buying the information contained within.

Solomon Neuhardt November 27, 2008 at 2:49 am

As an attorney, how do I go about figuring out what kind of consulting or training I can do? I do alot of consulting every day with existing clients but my work is very high stress so I am not looking to grow my law firm.

David Bullock November 27, 2008 at 11:34 pm

@Solomon – The question to answer is, “What is the big problem in your industry that you have a solution for?”

Answer that question and you have your product. Now: volume, cost and promotion are your concern.

Solomon Neuhardt November 28, 2008 at 12:33 am

@David – Great question David but frankly I dont have any idea. If consulting or training hinges on me figuring this out I could be in for a very long haul.

David Bullock November 28, 2008 at 12:39 am

Solomon:

It is not as hard as you are thinking. It is a matter of seeing what others don’t. But, nothing to handle in the “blog” environment. Let’s connect.

Gabe January 7, 2009 at 7:04 pm

“The biggest high margin products are information based: Consulting, Training and IP fall into that category. The buyer is not buying the cost of the paper, ink and printing. They are buying the information contained within.”

Agree, but these categories also have low barrier to entries, which makes it harder to distinguish from the competition.

A Hodges March 17, 2009 at 3:31 pm

Technology -oriented products and services tend to yield high-margin revenue streams by automating many processes and reducing a lot of overhead. A good example is our product, WorkXpress – custom software without programming. Vendors or Value-Added-Resellers (VARs) can provide custom applications and services faster and cheaper than with traditional, code-based methods. Anyone looking for a high-margin revenue stream and interested in becoming a software provider should give this product a close look!

Best wishes to all of you in your endeavors!

David Bullock March 18, 2009 at 10:35 am

@Gabe

Information products do have high margins. And you are right that anyone can copy the printed material (or ebook). The entry product is the short game. The long game is the relationship and the project.

The upsells to specific result that can be produced with the information is the distinguishing factor. Anyone can talk about a subject, but the one who can create a result in the marketplace with the information creates a barrier to entry. Case in point. A book that upsells to consulting that upsells to a project, is a typical cycle.

The book has a low barrier to entry. But as the client moves up the sales cycle, the barrier of entry becomes greater.

@ A Hodges

Very interesting application. Turning data into information is the name of the game. Excellent example of a creating value via technology. Thank you.

Renae July 28, 2009 at 8:49 pm

David,

Are you the author of 7 day profits?

gadis August 30, 2009 at 2:36 pm

thanks for share, you posting is great… i like this post

Isaac Efe August 1, 2011 at 6:06 am

thanks for the post, has really helped me with my study on business market operations.

raymond October 20, 2013 at 4:05 am

sir. david bullock How important is the product to the buyers?

David Bullock November 21, 2013 at 4:51 am

Extremely important. But please understand that they are not buying the product or service. They are buying the story about the product or service.

chouhan muzammil January 5, 2014 at 12:23 pm

hi David,
firstly i would like to congratulate for fantastic work u do.I’m into freight forwarding and custom clearance biz.how can i promote my biz
and convince potential customers.i mean what can make a a stand out.
also what will make a new customer to have faith and trust in my company.
regards.

Steve March 16, 2014 at 8:41 am

Excellent article .. As an IT developer you have got me thinking about high margin software and systems I can build and sell.. Thanks

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