Profit Margins Are Wildly Overestimated By the Public

The true profit margin for most companies is far below what you might think.

What do you think the average profit margin is for an American company? 10 percent? 15? 20? If you guessed these numbers, you'd be wrong, but you would be much closer than what many people believe.

According to economics professor Mark Perry, the polled public believes that companies have astounding after-tax profit margins of 36 percent. Reason-Rupe conducted the poll in May 2013, and posed this question: “Just a rough guess, what percent profit on each dollar of sales do you think the average company makes after taxes?”

This result is nothing out of the ordinary, surprisingly. ORC International posed a similar question in nine separate polls between 1971 and 1987: “What percent profit on each dollar of sales do you think the average manufacturer makes after taxes?” Responses to that question ranged between 28 percent to 37 percent, averaging at 31.6 percent.

The public’s ideas are rather detached from reality, even dating all the way back to the 1970s. So what are the real profit margins?

According to this NYU Stern database for more than 7,000 US companies (updated in January 2018) in many different industries, the average profit margin is 7.9% for all companies and 6.9% for more than 6,000 companies excluding financials. Interestingly, for nearly 100 industries analyzed by NYU Stern, there’s only one industry that had a profit margin as high as 36 percent – and that was tobacco at 43.3 percent. The next highest profit margin was 26.4 percent for financial services, but more than 72 percent of industry profit margins were single-digits and the median industry profit margin is 6 percent.

Why the disconnect? Likely because most people confuse revenues with profits. Consider this hypothetical: If company A does $500 million in sales a year and turns out a 5 percent profit, that’s a net gain of $25 million. Yes, that’s a lot of money, but that’s because of sheer volume, not because of exploitation or price gouging.

When a company does business in massive volume, that will turn small percentages into big numbers over time; hence why big companies have high-dollar earnings reports.

Perry also points out the real profit margins of some industries often vilified in our culture today.

“Big Oil” companies make a lot of profits, right? Well, that industry (Integrated Oil/Gas) had a below-average profit margin of 5.6 percent in the most recent period analyzed, and separately, the Production and Exploration Oil/Gas industry is losing money, reflected in a -6.6 percent profit margin. For the general retail sector, the average profit margin is only 2.3 percent and for the grocery and food retail industry, it’s even lower at only 1.6 percent. And evil Walmart only made a 2.1 percent profit margin in 2017 (first three quarters) which is less than the industry average for general retail, possibly because grocery sales now make up more than half of Walmart’s revenue and profit margins are lower on food than general retail.

What’s the conclusion to be drawn here? If the public completely overestimates how much the average company actually makes, it makes sense that those same people would believe these companies can afford massive minimum wage hikes and all the other demands placed on them.

If $36 of every $100 in sales at a company like Walmart, McDonald’s, Home Depot, Ford Motor Company or a local dry cleaner or restaurant really did turn into profits, then of course those companies could afford to pay unrealistic minimum/living wages of $15 per hour, accept unreasonable demands from labor unions, provide all sorts of generous fringe benefits including weeks of paid holidays, long paid maternity leaves, and gold-plated pension programs, etc.

Yet we do not live in a world where companies make $36 for every $100 in sales, and that makes these demands untenable for companies that wish to stay in business.

Did you think that businesses turned such a high profit? How does this information affect your views on the subject? Share your thoughts with us!