The Cult of High Profitability

A high profit margin provides a shield for the competitor. Businesspeople know that profit is not the same as profit margin. Profit equals the profit margin multiplied by the capital turnover. Consequently, maximum profitability and maximum profit volume are achieved at a profit margin that corresponds to the optimal market share and optimal capital turnover. Why can the cult of a high profit margin ruin a business? It not only shields the competitor but practically eliminates competitive risk and ensures the competitor's market dominance. Throughout business history, few products have been as successful as the copier machine invented by Xerox. But after this success, the company began chasing a higher profit margin. Clever devices were added to the machine, each primarily intended to increase the profit margin. However, each of these devices increased the price of the copier and, worse, made it more difficult to service. Most users did not need these additional features. Thus, the Japanese company Canon developed its copier. Canon's model was simple and cheap and conquered the U.S. market in less than a year. TIP OF THE DAY Can your company be accused of chasing a high-profit margin?