Which of the following types of firms do you expect to have high or low sales margins? Why?

Answer 1

Supermarket—Lowmargins. Competition in the supermarket industry is very intense. Different supermarkets carry most of the same brands of food so there is little differentiation of products. Consumers are sensitive to changes in the prices, and switching costs are very low, usually no more than the opportunity cost of going to another supermarket. Consequently, pricing is the major area of competition among supermarkets, leading to extremely low margins.
Pharmaceutical Company—Highsales margins. Drugs manufactured by pharmaceutical companies are often protected from competition by patents, allowing them to charge monopoly prices. Even where drugs are not protected by patents, pharmaceutical companies invest considerable resources in differentiating their products along non-price dimensions such as efficacy and ease-of-use. Consequently, pharmaceutical companies typically boast very high sales margins. As an aside, drug companies argue that these high margins are necessary to support their ongoing and expensive research for new drugs, much of which never makes it to market.
Jewelry Retailer—Highsales margins. Jewelry is a differentiated product where the typical buyer cannot easily assess the quality of the item being purchased. Consequently, differentiation among jewelry retailers falls along lines of intangibles such as service, quality, and reputation. The greater the differentiation, the higher the expected margin.
Software Company—High salesmargins. Margins are high for several reasons:
1 . There are relatively high switching costs for consumers learning a new system.
2 . Production costs are very low—just the expense of disks or CD-ROMs and manuals, or the costs of distributing software via the Internet and providing help on-line.
3 . Most of the initial software development costs have been previously expensed.
Hence, software companies tend to enjoy large margins.