Why higher margins matter more than ever in 2025
In today’s fast-moving market, building a higher margin business has become critical. It's no longer about selling more—it's about earning more from every sale. As customer acquisition costs rise significantly, maximizing profit per transaction is essential for long-term sustainability.
For loyalty, marketing, and sales professionals, the shift means focusing on value rather than volume. This involves carefully selecting products, setting strategic prices, and implementing loyalty-driven strategies that enhance customer lifetime value (CLV).
This guide clearly defines high profit margins, explains their calculation, and provides practical advice on how to increase margins through tactical decisions and loyalty strategies. By the end, you'll understand exactly how to implement these steps to achieve higher margins.
What defines a high margin product—and why it matters
A high margin product delivers significantly more revenue compared to its production cost. For example, selling a t-shirt for $12 with $11 cost yields only $1 profit. However, raising the price to $20 without increasing costs results in a $9 profit, transforming a low-margin product into a higher-margin opportunity.
Rather than focusing solely on cutting costs, businesses can use pricing strategy as a powerful lever. In fact, even a small 1% price increase can drive an 11% rise in profits, according to Harvard Business Review’s analysis of pricing elasticity across industries.
As a result, high-margin products let you earn more per transaction, making them ideal for businesses aiming to scale efficiently without significantly increasing operational complexity.
Profit margins: the clearest view of your business health
While revenue can look impressive, profit margins provide a clearer measure of true profitability. A profit margin represents how much money your business retains from revenue after covering costs, and it’s a primary indicator for investors and analysts when assessing performance (Investopedia).
Let's briefly revisit the main types of profit margins and then provide clear, actionable advice on improving each.
Gross margin
Gross profit margin measures how much money remains after subtracting the direct costs of producing goods or services, often referred to as cost of goods sold (COGS). It reflects your product-level profitability before accounting for other operating costs.
Formula:
(Revenue – COGS) ÷ Revenue × 100
For example, if you sell a product for $100 and it costs $60 to produce, your gross profit is $40. The gross margin is 40%.
Gross margin helps you evaluate which products or services contribute most to a higher margin. If margins are low, consider ways to reduce production costs or revise pricing to increase margin.
Operating margin
Operating profit margin takes things a step further by subtracting all operating expenses—like salaries, rent, marketing, and utilities—from your gross profit. It reflects how well your business manages its day-to-day operations.
Formula:
(Operating Income ÷ Revenue) × 100
Continuing from the previous example, if your gross profit is $40 and you spend $20 on operating expenses, your operating profit is $20, resulting in a 20% operating margin.
This metric shows whether your internal processes are helping or hurting your efforts to build a higher margin business. Streamlining operations can directly increase margin over time.
Pretax margin
Pretax profit margin includes both operating performance and non-operating items like interest payments or investment income. It gives insight into how financing decisions impact overall profitability.
Formula:
(Earnings Before Tax ÷ Revenue) × 100
For example, If your operating profit is $20 and you pay $5 in interest, your pretax profit is $15. With $100 in revenue, that’s a 15% pretax profit margin.
This margin highlights the cost of borrowing or other financial obligations. Managing debt and financial structure is critical if you want to increase margin sustainably.
Net margin
Net profit margin, often simply called “net margin”, is the final word on profitability. It accounts for all expenses, including taxes. This is the “true” margin that shows how much profit you actually keep from every dollar earned.
Formula:(Net Profit ÷ Revenue) × 100
For example, if your pretax profit is $15 and you pay $3 in taxes, your net profit is $12. That’s a 12% net profit margin on $100 in revenue.
For reference, the average net profit margin across all industries is around 8.5%, while general retail often averages closer to 3%. This makes a 12% margin an indicator of strong financial performance.
A healthy net margin indicates a well-run, financially balanced business. Increasing this figure—whether by improving efficiency, lowering costs, or increasing prices—is the most direct way to build a higher margin company.
High-margin businesses also tend to be more resilient in volatile markets because they generate more value per dollar earned—giving them more flexibility to invest, adapt, and grow.
How to calculate profit margin
Now that we’ve explored the four main types of profit margins, it’s useful to understand how to apply these insights at the product level. While the broader margin types pull from full financial reports, businesses often use a simplified formula to assess profitability per item sold.
Profit = Retail Price – Production Costs
This approach focuses on gross profit per unit, making it ideal for quick, tactical decisions. For example, if a product sells for $100 and costs $61 to produce, the profit is $39, resulting in a 39% margin. However, if another product with the same retail price costs $88 to produce, the margin drops to just 12%.
This comparison illustrates why tracking unit-level profitability is essential for building a higher margin product portfolio. While it doesn’t factor in overhead or taxes, it offers actionable data to help you increase margin in your day-to-day operations. The U.S. Small Business Administration also recommends using break-even analysis to identify how costs and sales volume impact profitability
When combined with broader margin metrics, this gives you a complete view—one that balances strategic planning with agile execution. To continue improving profitability, check out our guide on rewarding loyal customers, which outlines tactics to enhance customer lifetime value without sacrificing margin.
Practical tips to build a higher margin business in 2025
Here are five practical tips to directly answer your margin-building goal:
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Strategic pricing
Small, data-driven price increases often yield large profit gains. Monitor competitors, but differentiate through added value rather than price competition alone.
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Product bundling
Bundling complementary products encourages higher transaction values and improved perceived value—resulting in increased profit per sale.
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Customer segmentation
Tailor offerings to segments willing to pay premium prices. Identify high-value customers and create exclusive products or loyalty rewards tailored specifically to their preferences.
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Operational efficiency
Streamline operations by automating repetitive tasks, renegotiating fixed costs, or optimizing marketing budgets. Even modest operational adjustments can significantly impact margins.
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Loyalty strategies to boost margins
Invest in building customer loyalty through targeted programs. According to Bain & Company, increasing customer retention rates by just 5% can increase profits from 25% to 95%. Loyal customers typically spend more, refer new clients, and are less price-sensitive, directly boosting overall margins.
The critical role of loyalty in margin growth
Loyalty strategies directly impact profitability by increasing customer lifetime value. Reward loyal customers through exclusive offers, personalized recommendations, or tiered loyalty programs that encourage repeat purchases. By investing in these programs, you enhance your customers’ perceived value, reducing price sensitivity and naturally supporting higher margins.
Research consistently shows loyalty program members spend more per transaction and have higher purchase frequencies compared to non-members. Therefore, integrating customer loyalty initiatives is essential to sustainable margin growth.
The bottom line
Building a higher margin business means understanding profit sources, applying relevant margin metrics, and leveraging strategic pricing and operational efficiencies.
Above all, incorporating targeted loyalty strategies can enhance your margins dramatically. Small improvements in customer retention rates and transaction values significantly impact long-term profitability.
If you found this guide useful, dive into our related content on loyalty programs, pricing psychology, and customer retention strategies to keep fueling your higher margin growth.
