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For many people, identifying and targeting a set profit margin is an important part of their business's pricing strategy. Profit margin – particularly net profit margin – can be a significant and telling indicator of operational efficiency and financial health, which makes it both a useful metric and a prime target for overemphasis. Business owners and sales managers must understand that simply generating a nice profit margin does not guarantee success or longevity.

As an equation, net profit margin is determined by sales revenue, the cost of goods sold, the tax burden and so on. Looking through this perspective, a profit margin needs to be high enough to compensate for production costs, resource costs, taxes, debt payments (if any) and any middlemen who might take a cut of the sale, and it should still have enough left over to compensate for your time and business risks.

Look at successful competitors who have been in the industry a long time to gauge a realistic, healthy profit margin. Every sector has different standards for a good profit margin. For instance, clothing retailers routinely can mark up their goods by several hundred percent, which just is not realistic for many other products.

A business such as Walmart is able to compensate for relatively low profit margins by selling an enormous volume of goods every day. Your projected sales volume is an important consideration.

In fact, lowering your profit margins could be a net benefit if your lower prices drive more business to you and away from your competitors. If you make a little less on a per-sale basis – which is what profit margins are really designed to capture – you could make up for it in additional transactions.

Profit margins do not have to be uniform, either. If you offer a variety of products, each may require a different profit margin to maximize your revenue potential. One pricing strategy is to offer discounts on headline items to bring in customers and make up for those discounts through large margins on other goods.

Profit margins are the symptoms of good business practices, not the causes. Lower your costs of production or find ways to increase productivity from your staff, and you are sure to see that reflected in a healthier profit margin.

You have to be able to cover costs, and you need to earn a salary for your effort. Those are the fundamental considerations when determining how much to mark up your merchandise. If you want to grow your business, your profit margins have to be high enough to provide sufficient net earnings for capital reinvestment. There is no magic number for profit margins, and your specific pricing strategy should reflect the unique circumstances of your business, your industry, and your personal goals.

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