All the budding entrepreneurs would like to start a high profit margin business. The first query of readers who consult me is that they will prefer a business with high profit margin :). Let me clarify that margins depends on the nature and type of the business. Highly competitive businesses command a premium only on the basis of a brand value. At the macro level, i observed Japanese brands command a premium like Sony, Toyota, Honda etc. A premium pricing means high profit margin. On a lighter note, even a premium Chinese brand cannot command a premium in India :). Chinese goods symbolize with poor quality though it may not be true always. Therefore, for a budding entrepreneur, it is critical to identify a business idea that can command high profit margin.
Before we proceed, we need to understand what are the typical characteristics of a business that command premium or high profit margin.
Characteristics of High Profit Margin Business
1. Competition: Competition is inversely proportional to the premium i.e. high competition means less premium/discount. The best example, i can think of is of telecom business. When the competition was less the operators charged premium pricing. The profitability was very high. With an increase in competition, the margins dropped thus premium vanished. The new operators started discounting the calls and finally killed the sector.
2. Experience: It is more to do with service. It’s like paying 1.82L for 7 days tour on Golden Chariot or staying in Rambagh Palace, Jaipur. They charge Rs 6L per night for Presidential Suite. These are just an example for reference purpose. The point i am trying to make is that customer is willing to pay a premium for the experience.
3. Unique: The business of art and paintings come under this category. I was reading somewhere that one of the painting “Birth” by FN Souza fetched $4 Mn in Christie’s Auction. Nita Ambani bought it for $2.5 Mn and sold for $4Mn. Therefore, cool profit of $1.5 Mn. The trading of art and paintings is a good business but require a hell lot of money. From an entrepreneur perspective, the business idea should be unique or new for the particular geography.
4. Perceived Value: Products or Services with high perceived value command a premium pricing thus high profit margin. The best example, i can think of is of International Schools. The curriculum is same but parents are willing to pay double the fees for international schools. It also includes aspirational value. For example, Apple Mobile phones or Royal Enfield Bikes. One of my friends was willing to wait for 18 months for a Royal Enfield. Quite amazing. The parent company i.e. Eicher Motors is one of the most profitable Auto Company in India. The last quarter profit zooms by 76%. These are high profit margin businesses as they command a premium because of perceived/aspirational value.
5. Status: Any product or service that adds to the status commands premium pricing. In this point, it will be unfair if i share an example of outside Delhi or for that matter North India. Some time back, i attended a marriage of a friend in Delhi. The talk of the town was catering of BTW. I heard of BMW but could not understand what is BTW. If i ask someone then i will look FOOL. I asked an employee of BTW. He told me it is Bittu Tikki Wala. I did a little research on the net and found he had a small stall in West Delhi and now an international brand/caterer. I stay in the south so didn’t know about him. A Veg Thali of BTW was costing Rs 2000 with taxes. The guests were more concerned about the cost of Thali rather the quality of food. Trust me, it must not be costing more than Rs 700 but it adds to the status of the host. Therefore, high profit margin business.
The second big attraction of the wedding was a DJ Sumit who charge Rs 2L for 1 hour. OMG, there was a mad rush to dance on DJ Sumit’s beats. I was wondering whether this is the last one hour of the Bollywood and Punjabi music on this planet. Therefore, any product/service that adds to the status is high profit margin business.
Top 5 High Profit Margin Business Ideas
I already shared examples of some of the high profit margin businesses. I know that i cannot start any of the above-mentioned businesses. Now let’s wear the cap of an entrepreneur. I am listing some business ideas that can command premium pricing.
1. Wedding: Trust me anything to do with a wedding can fetch premium pricing. It is once in a lifetime single event (for 99% husbands) wherein from poor to rich spend more than their financial capacity. The best part is, i have not seen anyone bargaining for wedding shopping or preparation. A flower of rose costing Rs 7 on normal days is sold for Rs 20 to wedding house. A wedding card of Rs 250 to Rs 500 is normal. It is high profit margin business.
One of my school friends is in this business and he works only for 4 months in a year i.e. during wedding season and is on a holiday for rest 8 months. The key requisite is good social contacts and goodwill. During my marriage, a photographer charged Rs 20,000 for 5 days event. Now people hire photographers who charge min 1L per day. Everything is on a large scale during the wedding. Therefore, identify a good business idea. This industry will never face recession. Wedding planning is almost zero investment business. To learn this business, you should watch the movie, Band Baaja Baarat.
2. Sculptures: This is more of B2B business. You must have seen the big/life size sculptures in offices, bungalows, hotels, restaurants etc. I never found any shop or showroom selling this kind of sculptures. By chance, i knew one of my clients who deal in these sculptures. Few years back, i casually asked him the cost of one pair of elephant sculptures. It was costing Rs 8L. I liked so much that i took a pic.
Few years back, i planned a holiday in Mahabalipuram near Chennai. My dream came true, i found so many workshops that were manufacturing the same. I showed them the pic of elephant pair and they quoted a price of 1.5L and 50k for transportation. Imagine the profit margin i.e. 3 times the cost. In a year, you need only 4-5 orders but again this business needs good contacts. I was wondering if i get a single order of any Five-star hotel then i am done for my life. Happy retirement planning :)
3. Arbitrage Opportunities: As i shared in one of my posts on arbitrage opportunities that geographical specialties provide arbitrage opportunities. I shared an example of one of a friend who exports flowers. Similarly, i came across a case wherein a person from Chandigarh directly import spices from Kochi and supply in Punjab. This is just an example. I observed people importing food items, flowers, gift items, clothes etc. This concept works well with high perceived value items.
4. Services: In my opinion, the services is 100% profit margin business. You can charge premium depending on the services. I observed that good Kerala Massage Centre in Delhi charge premium pricing. The owner hired all the employees from Kerala. It is high profit margin business. Similarly, i suggested one of my friend who is an IITian to start coaching in his hometown that is a small town. IIT coaching is aspirational and from an IITian command premium pricing. It may not work in big cities but small cities still lack coaching facility. He started weekend classes for a second income. Here premium pricing is a relative term. In the case of coaching classes, the premium is with respect to the pricing of other coaching institutes in the same area. Another profession with good money is Digital Photography.
5. Consulting: Sometimes people find difficult to venture into unknown territory. If you are a known person in your domain or specialize then you can also start consulting business and charge premium pricing. The only pre-condition is that an individual should be extraordinary in his field. In order to cut cost, companies have started hiring consultants who are good in their domain. The consulting business is high profit margin business. There is not much investment. A person can create a brand and earn big moolah if it clicks.
Words of Wisdom: I shared some of the business ideas with the help of examples. All the examples are shared only for reference. It is not necessary that you should start the same business as shared in the post. My intent is to share the thought process. Maybe you know a killer business linked to the points mentioned in the post. In this competitive world, it is very difficult to command premium pricing. If you identify high profit margin business, others will be quick to replicate. Therefore, you should have some key skill sets that others may find difficult to replicate. I have not included Ecommerce in my post. In my opinion, Ecommerce cannot be a high profit margin business with handful exceptions. To sell itself is a big challenge. It burns a lot of cash. A startup in Ecommerce may find it difficult to command premium pricing or for that matter survive.
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Interesting.
Sir,
in this connection we can remember another business of high profit with worthless products- Life Insurance Products (other than Term Insurance).Most of the people in our country buy Life insurance products for savings,not for Insure someone’s life.
There are 3 points that go against (a) It is very difficult to sell insurance (b) The average premium is very low and now the commission structure is not that lucrative (c) Online life insurance has eaten into offline business.