If I'm a person who believes income is the same thing as revenue, how would you explain this division to me in a way I'd understand? Or does "income" in this case mean "profit"?
Absent a true monopoly or government protection high margin businesses are usually those most ripe for disruption. Someone eventually comes along and, for various reasons, is willing to make far lower margin and then the battle begins. Lots of sleepy high margin businesses out there just waiting to get picked off by a new entrant.
Good article although especially in tech it’s not so simple. Thanks to games with depreciation and other financial engineering a company may look “profitable” but still be quite unhealthy or at risk. One generally needs to look at “profit” in the context of cash flow.
I.e. a company could be “profitable” but also basically broke at the same time with no cash to pay people or suppliers.
hmm yes but also most great startups have a negative operating margin on paper since they re-invest almost all their earnings into development, marketing, etc... just dividing earnings by revenue won't give meaningful insight in most companies that intend to grow or expand.
Operating margin doesn't include interest or taxes; it is an incomplete ratio (but any single ratio will be incomplete) when comparing companies across industries with different capital expense levels, debt levels, and tax exposures.
This article compares the gross profit vs. net profit differences by industry.
If you enjoyed this you'll probably also enjoy "The Games People Play With Cash Flow" [0]
And for the classic HN comment about the site itself: I think it looks very nice, but the native justification algorithm is not very good (especially with hyphenation turned off) so it ends up looking quite sparse at parts on mobile and is a bit jarring to read. I'm a big fan of this implementation [1] of the TeX linebreak algorithm for the web, and think it would make this site look even better with minimal effort.
Gross margin along with ebitda are great ways to do quick views on a company from an investor standpoint. You don’t care about tax, interest depreciation because those things can easily change, you care about the core business. Gross margins are high but ebitda margins are low? Then you know where to look in the finances to ask the first question of what is happening in the middle. If gross margins are low, probably a non starter unless it’s a non commodity product where you can raise price.
Would be interesting to see the historical trends for operating margins.
These days it seems that 30%+ operating margins are what VCs and stock market are expecting now, which seems unsustainable. Software and similar businesses can easily do it because cost of manufacturing one more unit is close to zero, all the costs are primarily NRE. Not all business fit that model and but yet they all aspire to the same margins.
> While it's not illegal to try and compete with Nvidia (margin in 2025: 61%) or Mastercard (margin in 2025: 54%), it's just so capital-intensive to catch up with their graphics card R&D / bank partner network that few companies are brave enough.
I think the "quasi-monopoly" segment is the best attack vector if you are willing to get your hands a bit dirty. Companies like Mastercard and Visa are the closest thing you'll get to an actual money printer.
The trick with starting these kinds of businesses is to find one customer (B2B) who is willing to do the crazy thing with you. Someone who is fed up with the current state of affairs in their domain. Ideally, someone who is already a customer of one of these vendors you seek to compete with.
If I wanted to build a payment network from scratch, I would partner with a bank and begin with existing payment rails (Jack Henry, etc.,). and layer value-add on top (custom fraud detection, rewards programs). Over time, issuance, merchant acquiring and other concerns could be discussed once the trust and value proposition has been proven out. This is a very long play.
The hardest part of breaking in is finding that first customer and making sure they're a good one. If you have a good partner, it really does feel like cheating by comparison. I've worked with banks who could get things out of vendors with a five minute phone call that we couldn't in a million years. Stack a few of these and it begins to look like you're on the correct side of the moat.
Every other type of business I come across or analyze makes me think "Man, there really is nothing as good as SaaS" and I thank my lucky stars I was here for it.
High 80%+ gross margins; high retention/recurring revenues (if you're doing it right); easily metric'd (CAC, LTV, conv%, etc); capital specialized for deploying into it (most VC of the last decade); alignment with clients w.r.t. value/impact (or they don't renew); straightforward lining up of 'value to customer' and pricing; common benchmarks and shorthands for valuation multiples; etc.
Simple business to understand / run / grow, assuming you have a good product in a good market.
I really hate the terminology of the first sentence
> Divide a company's income by its revenue
How about dividing a companies operating profit by its revenue? Income is a vague term and is just as often equated with revenue... which makes the opening sentence a bit weird.
Going further, most people talking about different sectors having different margins are talking about the gross profit margin. In a retailer gross profit could be the sales minus the cost of the things that got sold and probably the cost of the people in the stores. In a service business it is normally the sales minus the cost of people doing the work that was sold. At a hosting company it could be the sales- minus the electricity, Internet, engineers.
The important distinction is that gp does not normally include 'head office costs', accountants and other parasites, so it is easier to compare the different segments from the amount they are going to contribute towards your fixed costs.
This is maybe the first dataset I've seen that clearly illustrates how margin (profit) is inversely correlated with value to humanity.
Other than Ports, the top 7 highest-margin industries (stock/crypto exchanges, stock exchanges, banks, toll road operators, financial services and asset management) are in financialization and rent-seeking, basically acting as middlemen that use other people's money to extract wealth.
Meanwhile the bottom 7 lowest-margin industries other than LiDAR and aircraft leasing (CRISPR, gene therapy, hydrogen fuel cell, genomics and mRNA therapeutics) arguably have some of the greatest potential to improve quality of life and help the planet.
Sometimes it feels like everything that I care about most has been marginalized and commodified to the point of financial inviability. Meanwhile people who simply came out on the winning side of the multiverse and pulled up the ladder behind them are doing so well that they mock the rest of us for working by actively making our lives harder at every opportunity.
>> This is maybe the first dataset I've seen that clearly illustrates how margin (profit) is inversely correlated with value to humanity.
9th from the bottom is EV charging. You might think that's going to improve quality of life, but the reality is these are companies trying to be middle men in a commodity market. They want to profit from delivering electricity to locations along the highway. It's kind of stupid because most people can charge at home overnight and be good for the next day or three. OTOH if you're going on a long trip you'll want to plan stops at these places but since you're planning you can check prices too.
> stock exchanges, banks, toll road operators, financial services and asset management are in … rent-seeking.
This is an absolutely insane take. If you truly believe it, then I propose two tests:
1. You should start a business that provides the same services without rent seeking. If they’re really these low-value things that are just charging high prices, then you should be able to setup very attractive alternatives, make a ton of money yourself, and improve the world in a big way.
2. If you don’t have the energy or willingness to start them yourself, you could limit your use of them to the absolute bare necessity. If you believe they extract value, you could probably do better for yourself by using them less.
Agree with the general point. I’d maybe add that a lot of times it’s the scale of the profit that makes something a net negative for humanity, not the percentage based margin. A lot big tech started small and in the early stages created a ton of positive value, sometimes with a respectable margin, but once they are at billions of market capitalization and starts chasing profits for investors, the positive societal value gets eroded.
> Meanwhile the bottom 7 lowest-margin industries other than LiDAR and aircraft leasing (CRISPR, gene therapy, hydrogen fuel cell, genomics and mRNA therapeutics) arguably have some of the greatest potential to improve quality of life and help the planet.
You're missing how the calculation works.
Suppose you work in a lab doing genomics etc. You get paid, say, $100,000/year, and you require some equipment which costs another $100,000/year to pay off and which goes to pay the salaries of the people who invented or manufactured it. Then your lab has $210,000/year in revenue, which means $10,000 in profit and a margin of ~5%, which isn't super high.
That's good! It means the people paying for your services aren't paying a huge margin on top of your salary to receive your services so more people can afford it. Or it means you're getting paid $100,000 instead of $60,000, the latter of which would have quintupled the investors' profit but reduced your incentive to do that work, reducing the quality of the people they can attract to do it.
Whereas industries with high net margins are the ones that are the most dysfunctional or captured by incumbents. It's no surprise that all the finance stuff is there at the top since that's the most thoroughly captured industry in the country. But that doesn't mean you want other things to be like that, it means you want those things to be more competitive so the money is going to customers as lower prices or workers as higher wages instead of going to fat cats as higher margins.
Generally "income" refers to net income, which, then invalidates "divide a company's income by its revenue, and you get the operating margin". Perhaps the author means to say "operating income". In any event, operating profit and even net income don't give you a good approximation of cash (unless you're doing cash accounting, which no real company is doing) because they include non-cash charges such as depreciation and amortization.
So this article is conflating the 3 different types of margins [1], and that's at least partially responsible for the results it gets. It talks about operating margins, but the definition that it gives is actually the definition for net margins, net income / revenue. Operating margins uses operating income, which excludes interest, taxes, and capital expenses. There's also gross margins, which are basically the value you add over cost of inputs divided by your revenue, not counting salaries, marketing, customer acquisition, or any of the other stuff you have to do to get from raw materials to products in customers' hands.
The article found that the highest margins are in ports, financial services, toll roads, etc. with certain key (but not all) software, AI, and semiconductors having good margins. But this is a logical consequence of the definition of margin they chose. These are all very capital-intensive businesses: it takes a huge amount of money to build a port, or a fab, or a search engine, or a road, or to start up a bank or insurance company. The financing cost of building these capital improvements, as well as the depreciation on them, is explicitly excluded from the definition of "margin" that the article chose.
Note also that this explains why certain semiconductor and tech companies have high margins but many are very low-margin. If you are TSMC or Intel, you own your own fabs. You spend tens of billions of dollars to construct them, and the financing cost of those investments is explicitly excluded from the definition of "margin" chosen by the article. But if you are a random ASIC manufacturer, you pay TSMC to fabricate your chips, and those payments are included in Cost of Goods Sold and excluded from your gross margin, let alone your operating margin. Likewise, if you are Google, Amazon, or Microsoft, you're making huge capital investments in datacenters. But if you're a random SaaS, your cloud computing costs are included in COGS, they become revenue for the cloud provider, and so your operating margins look much worse.
I'd be much more interested in seeing the analysis re-run with net margins.
Thank you! I was just about to rant about this and decided to scroll to see if anyone had already called this out.
The article is quite embarrassing - it’s ok if you don’t know how P&L statement and balance sheet work, but writing an entire blog post without ever feeling the need to verify basic terminology is either very lazy or very ignorant…
I'm suprised that pharmaceuticals having quite low margin compared to other industries. This report shares an opposite story (https://pmc.ncbi.nlm.nih.gov/articles/PMC7054843/), but maybe because the numbers are not very recent (10 years ago)
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[ 2.9 ms ] story [ 57.9 ms ] threadIf I'm a person who believes income is the same thing as revenue, how would you explain this division to me in a way I'd understand? Or does "income" in this case mean "profit"?
> Country Median Margin Average Margin Sample Size > South Africa 28.86% 82.37% 7
How can the average be 82% with a median being 28% without having one that is above 100%?
Absent a true monopoly or government protection high margin businesses are usually those most ripe for disruption. Someone eventually comes along and, for various reasons, is willing to make far lower margin and then the battle begins. Lots of sleepy high margin businesses out there just waiting to get picked off by a new entrant.
I.e. a company could be “profitable” but also basically broke at the same time with no cash to pay people or suppliers.
The margin on most items is 4% (some lower, some higher e.g. luxury items are 10%).
4% is not terrible in and of itself.
But then you factor in:
- advertising costs
- conversion rates on clicks from the above
- taxes
and you get a real appreciation for how hard it must be to run high volume/low margin businesses.
Sure, you can do organic marketing etc but then you are just trading time for dollars.
This article compares the gross profit vs. net profit differences by industry.
https://www.venasolutions.com/blog/average-profit-margin-by-...
And for the classic HN comment about the site itself: I think it looks very nice, but the native justification algorithm is not very good (especially with hyphenation turned off) so it ends up looking quite sparse at parts on mobile and is a bit jarring to read. I'm a big fan of this implementation [1] of the TeX linebreak algorithm for the web, and think it would make this site look even better with minimal effort.
[0] https://commoncog.com/cash-flow-games/
[1] https://github.com/robertknight/tex-linebreak
--
[a] Warren Buffett has written and spoken extensively about return on invested capital for more than six decades.
These days it seems that 30%+ operating margins are what VCs and stock market are expecting now, which seems unsustainable. Software and similar businesses can easily do it because cost of manufacturing one more unit is close to zero, all the costs are primarily NRE. Not all business fit that model and but yet they all aspire to the same margins.
I think the "quasi-monopoly" segment is the best attack vector if you are willing to get your hands a bit dirty. Companies like Mastercard and Visa are the closest thing you'll get to an actual money printer.
The trick with starting these kinds of businesses is to find one customer (B2B) who is willing to do the crazy thing with you. Someone who is fed up with the current state of affairs in their domain. Ideally, someone who is already a customer of one of these vendors you seek to compete with.
If I wanted to build a payment network from scratch, I would partner with a bank and begin with existing payment rails (Jack Henry, etc.,). and layer value-add on top (custom fraud detection, rewards programs). Over time, issuance, merchant acquiring and other concerns could be discussed once the trust and value proposition has been proven out. This is a very long play.
The hardest part of breaking in is finding that first customer and making sure they're a good one. If you have a good partner, it really does feel like cheating by comparison. I've worked with banks who could get things out of vendors with a five minute phone call that we couldn't in a million years. Stack a few of these and it begins to look like you're on the correct side of the moat.
High 80%+ gross margins; high retention/recurring revenues (if you're doing it right); easily metric'd (CAC, LTV, conv%, etc); capital specialized for deploying into it (most VC of the last decade); alignment with clients w.r.t. value/impact (or they don't renew); straightforward lining up of 'value to customer' and pricing; common benchmarks and shorthands for valuation multiples; etc.
Simple business to understand / run / grow, assuming you have a good product in a good market.
It really is quite the business model.
> Divide a company's income by its revenue
How about dividing a companies operating profit by its revenue? Income is a vague term and is just as often equated with revenue... which makes the opening sentence a bit weird.
Going further, most people talking about different sectors having different margins are talking about the gross profit margin. In a retailer gross profit could be the sales minus the cost of the things that got sold and probably the cost of the people in the stores. In a service business it is normally the sales minus the cost of people doing the work that was sold. At a hosting company it could be the sales- minus the electricity, Internet, engineers.
The important distinction is that gp does not normally include 'head office costs', accountants and other parasites, so it is easier to compare the different segments from the amount they are going to contribute towards your fixed costs.
Other than Ports, the top 7 highest-margin industries (stock/crypto exchanges, stock exchanges, banks, toll road operators, financial services and asset management) are in financialization and rent-seeking, basically acting as middlemen that use other people's money to extract wealth.
Meanwhile the bottom 7 lowest-margin industries other than LiDAR and aircraft leasing (CRISPR, gene therapy, hydrogen fuel cell, genomics and mRNA therapeutics) arguably have some of the greatest potential to improve quality of life and help the planet.
Sometimes it feels like everything that I care about most has been marginalized and commodified to the point of financial inviability. Meanwhile people who simply came out on the winning side of the multiverse and pulled up the ladder behind them are doing so well that they mock the rest of us for working by actively making our lives harder at every opportunity.
9th from the bottom is EV charging. You might think that's going to improve quality of life, but the reality is these are companies trying to be middle men in a commodity market. They want to profit from delivering electricity to locations along the highway. It's kind of stupid because most people can charge at home overnight and be good for the next day or three. OTOH if you're going on a long trip you'll want to plan stops at these places but since you're planning you can check prices too.
Every day is a new chance to re-examine what you most care about and make some surprising discoveries.
Or not :)
Article says Unit Economies or regulatory monopoly, but I'd be interested in something that goes deeper, specifically around financial services.
This is an absolutely insane take. If you truly believe it, then I propose two tests:
1. You should start a business that provides the same services without rent seeking. If they’re really these low-value things that are just charging high prices, then you should be able to setup very attractive alternatives, make a ton of money yourself, and improve the world in a big way.
2. If you don’t have the energy or willingness to start them yourself, you could limit your use of them to the absolute bare necessity. If you believe they extract value, you could probably do better for yourself by using them less.
You're missing how the calculation works.
Suppose you work in a lab doing genomics etc. You get paid, say, $100,000/year, and you require some equipment which costs another $100,000/year to pay off and which goes to pay the salaries of the people who invented or manufactured it. Then your lab has $210,000/year in revenue, which means $10,000 in profit and a margin of ~5%, which isn't super high.
That's good! It means the people paying for your services aren't paying a huge margin on top of your salary to receive your services so more people can afford it. Or it means you're getting paid $100,000 instead of $60,000, the latter of which would have quintupled the investors' profit but reduced your incentive to do that work, reducing the quality of the people they can attract to do it.
Whereas industries with high net margins are the ones that are the most dysfunctional or captured by incumbents. It's no surprise that all the finance stuff is there at the top since that's the most thoroughly captured industry in the country. But that doesn't mean you want other things to be like that, it means you want those things to be more competitive so the money is going to customers as lower prices or workers as higher wages instead of going to fat cats as higher margins.
The article found that the highest margins are in ports, financial services, toll roads, etc. with certain key (but not all) software, AI, and semiconductors having good margins. But this is a logical consequence of the definition of margin they chose. These are all very capital-intensive businesses: it takes a huge amount of money to build a port, or a fab, or a search engine, or a road, or to start up a bank or insurance company. The financing cost of building these capital improvements, as well as the depreciation on them, is explicitly excluded from the definition of "margin" that the article chose.
Note also that this explains why certain semiconductor and tech companies have high margins but many are very low-margin. If you are TSMC or Intel, you own your own fabs. You spend tens of billions of dollars to construct them, and the financing cost of those investments is explicitly excluded from the definition of "margin" chosen by the article. But if you are a random ASIC manufacturer, you pay TSMC to fabricate your chips, and those payments are included in Cost of Goods Sold and excluded from your gross margin, let alone your operating margin. Likewise, if you are Google, Amazon, or Microsoft, you're making huge capital investments in datacenters. But if you're a random SaaS, your cloud computing costs are included in COGS, they become revenue for the cloud provider, and so your operating margins look much worse.
I'd be much more interested in seeing the analysis re-run with net margins.
[1] https://www.investopedia.com/ask/answers/102714/whats-differ...
The article is quite embarrassing - it’s ok if you don’t know how P&L statement and balance sheet work, but writing an entire blog post without ever feeling the need to verify basic terminology is either very lazy or very ignorant…