Margins are just one part of your Economic Model. Margins can be defined simply as the difference between your Direct Cost to deliver a service or a product (often called COGS or Cost of Goods Sold) and the price you charge the customer for that product or service.
The basic coffee you buy at Starbucks costs about 10 cents to make, including the cup, yet might sell for $2.00. Therefore, $1.90 is the margin.
However, don’t confuse margin with profit. Margin has only accounted for direct costs, and there are plenty of indirect costs that have to be accounted for.
In our Starbucks example, we have to cover such indirect costs as rent, utilities, the salary for the barista, and so on before we make a profit.
Are your margins sufficient to cover all your indirect costs and still contribute to profit?
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