Profit 101 Video: How to get to 50% Profit Margins, Part I
Oct 12, 2023
Achieve 50% Profit Margins in a Software Business
If you see my ridiculous setup here, then it matches the topic, which is how to generate a 50% margin in a startup business, specifically a SaaS software business. The Profit 101 series, of which this is a part, has been in blog post format up to now. Here, I'm trying video, thinking that using the whiteboard might be a good way to get the idea across. Our topic is how to hit 50% margins, specifically in a software business. I'll start by explaining what I mean by that.
I'll note that using random stuff you already have around the house and not spending a lot of money is probably a good way to hit a 50% profit margin. For context, most of the highly profitable companies that we all know, even big-name companies, very few of them actually deliver on a 50% margin. That level of profitability is rare, but I've achieved it, so I know it can be done.
Let's start with some background on unit economics. For instance, if you consider the title "Profit 101", let's specifically talk about unit economics and how to get to 50% margins. If you aim for half of every dollar coming from your customer to go to your bottom line, that restricts how much you can spend, including the cost of your actual product.
Let's say, hypothetically, we use $100 as our price point. So, the total revenue we're getting from the customer is $100, and we're aiming for half of that to be profit. I'm talking pre-tax profit here. If you aim for 50% post-tax margins, there are businesses that have achieved that, but they are rare. So, let's focus on 50% pre-tax margins.
That means we have to run our entire business on the other half. For this particular transaction of $100, that means we've got $50 to work with. If you consider the cost of goods sold, there's a concept called gross margin, which is how much money is left after you provide the service to the customer.
For example, if you're Amazon.com or Walmart, achieving these kinds of margins is impossible in their e-commerce business. But in the SaaS world, it's achievable. If $100 comes from the customer and $50 is our target profit, that leaves $50 for expenses. Right off the bat, about 3% goes out for processing fees. This leaves us 47% to run our entire business, which includes all salaries, marketing, sales, and other costs.
In the SaaS world, you have hosting costs, API costs, and other foundational costs. To achieve a 50% margin, only about one-third of your revenue can be spent on the actual business. The beauty of achieving such a margin is that it leads to an exceptionally valuable company. It's not easy, but the series of videos will discuss how to get there. Keep that number in mind as we'll delve deeper into how to reduce costs and pursue extraordinary profit margins, which can lead to extraordinary exits.
Watch Part 2 of the series here: How to get 50% Profit Margins, Part 2 Video
More Posts from the Profit 101 Series
Startup Costs Video Series
Pursuit of Profits