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One of your biggest risks is that you end up the hook for stuff that you can't sell. That severity of that risk scales with price of goods, so your margins have

• Dylan16807 5y ago
  Yes, a component. But it shouldn't be roughly the entire cost that scales that way.
  • tomnipotent 5y ago
    Another way to think of it, is that history has shown that a ~65% product margin is the band where most businesses succeed and capital returns are best realized. I know that's not a very "sexy" answer, but a lot of realities are driven on access to capital which is driven by your margins and how it compares to other companies that are also seeking capital. So it's less that costs scale, and more that you manage your business to keep margins at a certain band.
    • Dylan16807 5y ago
      But that's the ultimate average number. If you group businesses by stocking costs and materials costs and labor costs and sales costs you'll probably see significant differences.
      • tomnipotent 5y ago
        Most businesses will have very different cost distributions, because no two businesses are the same (even if two companies do the same thing). But there's still pressure on what your margins are expected to be by existing and potential investors, in no small part because of expectations of returns based on risks of the business and it's capital management strategy. And is less an "average" number and more of a benchmark to aim for. It's perfectly possible to run a business on a 55% margin, but investors have options and whether it's VC or traditional bank loans this number is going to come up and be a distinguishing factor on cash availability.