How to build a higher margin business in 2025

Why higher margins are more important than ever in 2025

Building a higher margin business is important in today's fast-paced market. It's not about making more sales anymore; it's about making more money on each one. As the cost of getting new customers rises, it's important to make the most money per deal for long-term success.

The change means that for sales, marketing, and loyalty teams will have to focus on value instead of volume. This means choosing products with care, setting prices strategically, and using loyalty-based tactics that increase 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 instance, if you sell a t-shirt for $12 but only spent $11, your profit is $1. rising the price to $20 without rising costs, on the other hand, makes a $9 profit, turning a low-margin product into a higher-margin chance.

Businesses don't have to just focus on cutting costs; they can also use price strategy as a powerful tool. According to a study by Harvard Business Review of pricing flexibility across industries, even a small price increase of 1% can lead to an 11% rise in earnings.

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

Even though sales can look good, profit ratios are a better way to see how profitable a business really is. A profit margin shows how much money your business keeps from sales after paying its costs. It's one of the main ways investors and experts measure success.

Let's quickly go over the different types of profit margins and then give you clear, actionable tips on how to improve each one.

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

The operating performance and non-operating items, such as interest payments or investment income, are both part of the pre-tax profit margin. It helps you understand how choices about finances affect your overall profits.

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 sales, that's a 15% profit margin before taxes.

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

The final word on income is net profit margin, which is often just called "net margin." It keeps track of all costs, even taxes. It shows how much profit you keep from every dollar earned, which is the "true" margin.

(Net Profit ÷ Revenue) × 100

For example, if your pretax profit is $15 and you pay $3 in taxes, your net profit is $12. On $100 in sales, that's a 12% net profit margin.

In general retail, the average net profit margin is around 3%, while the average net profit margin across all businesses is about 8.5% (source). 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.

Higher margin businesses are also more likely to be able to handle unstable markets because they make more money per dollar spent. This gives them more freedom to spend, change, 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 method is great for making quick, tactical choices because it is based on gross profit per unit. A 39% margin means that the product makes a profit of $39 when it sells for $100 and costs $61 to make. The profit drops to just 12%, though, if making another item with the same selling price costs $88.

This example shows why keeping track of unit-level revenue is important for making a portfolio of higher-margin products. It doesn't take into account taxes or extra costs, but it does give you useful information that you can use to improve your daily operations and make more money. The U.S. Small Business Administration also says to use break-even analysis to see how prices and sales numbers affect making money.

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:

1. Strategic pricing

   Small, data-driven price increases often yield large profit gains. Monitor competitors, but differentiate through added value rather than price competition alone.

2. Product bundling

   Bundling complementary products encourages higher transaction values and improved perceived value—resulting in increased profit per sale.

3. Customer segmentation

   Customize your products for segments who are willing to pay more. Find your most valuable customers and give them exclusive products or gifts for being loyal that are just right for them.
   

4. Operational efficiency

   Streamline operations by automating repetitive tasks, renegotiating fixed costs, or optimizing marketing budgets. Even modest operational adjustments can significantly impact margins.

5. Loyalty strategies to boost margins

   Invest money on tailored programs that will make customers loyal. Bain & Company says that if you can keep 5% more of your customers, your income can go from 25% to 95%. Customers who are loyal tend to spend more, bring in new customers, and care less about price, which directly increases total margins.
   

The critical role of loyalty in margin growth

By improving the lifetime value of a customer, loyalty tactics have a direct effect on profits. Reward customers who buy from you again and again by giving them special deals, personalized suggestions, or tiered reward programs. When you put money into these programs, you make your customers think your business is worth more, which makes them less sensitive to price and naturally supports higher margins.

Research regularly shows that people who are members of a rewards program buy more often and spend more on each transaction than people who are not members. So, combining customer reward programs is necessary for long-term profit growth.

The bottom line

Building a higher margin business, you need to know where the profits come from, use the right margin measures, and take advantage of smart pricing and operational efficiencies.

Most importantly, using focused loyalty tactics can make your profit margins much bigger. Small changes in the number of repeat customers and the value of transactions have a big effect on long-term profits.

If you liked this guide, check out our related content on price psychology, loyalty programs, and ways to keep customers coming back to keep your higher margin growth going.