Margins and Business Models

One area that I find many first-time entrepreneurs don’t think through is the type of potential margins for their business model. Let’s talk about the two main types of margins:

• Gross margins are the percent of revenues after only the product/delivery costs are taken out.
• Net margins are the percent of revenues that result in profit after all costs.

As an entrepreneur, it is important to understand both gross margins and net margins. For me right now, I’m only interested in business models with potential gross margins greater than 70%. That typically rules out physical products, services, and other businesses that are labor intensive. High gross margin businesses are important to me because they often provide for more scalable enterprises, with greater profit opportunity, which allows for more latitude to invest in growth.

What else? What other considerations do you have for margins and business models?