Kojo Quartey: Advertising and profit margins — who’s making money?

Kojo Quartey

If you watched the Superbowl commercials, did you wonder why some of those companies were paying $7 million for a 30-second ad? Are they earning so much from their businesses that they could really afford to spend that money? These were beer companies, food companies, telephone companies and much more. The $7 million cost does not include how much it costs to make the commercial and pay those, including some megastars, to star in the commercials.

Kojo Quartey, president Monroe County Community College
Kojo Quartey, president Monroe County Community College

Companies that advertise are the ones in industries where there is significant competition and the products tend to be similar enough that they have to find a way of differentiating their products in some way other than price. The advertising is to convince the consumer that there is really a difference, which could perhaps only be in your mind.

A few examples are in order. First, sodas, such as Coca-Cola and Pepsi; personally, I cannot tell the difference in taste so anyone goes. I know there are those who can definitely tell the difference. Then there is beer such as Bud Light versus Miller Light. Is there really a difference in taste? While many of us may not use or consume some of the products advertised, I know that almost all of us use cell phones. Verizon, T-Mobile, Metro by T-Mobile, and others offer services that tend to be very similar, and somehow the consumer has to be convinced that they are different. In economics, we say that the purpose of advertising is to shift the demand curve to the right, or simply to increase the amount purchased by the consumer at various prices. And large sums of money are spent to do this, while still maintaining a fair profit margin.

Businesses exist to maximize profits or some utility function of profits. In common parlance that means they want to make as much money as possible. No one goes into a for-profit business to lose money. Now for social entrepreneurs, certainly their purpose is different, as they want to impact society positively. Many for-profit businesses also have a social obligation, however, in order to be more accountable to society, they need to make more money. Simply put, big business is making lots of money. If expenses exceed revenues that is a loss.

Now, with all that said, which industries (collection of firms producing/providing the same or similar products/services) have the highest profit margins?

According to full:ratio.com, these were the industries with the highest profit margins in 2024, identified by industry, average gross profit margin, average net profit margin:

  • Banks - Regional/99.8%/27.5%

  • REIT - Mortgage/92.2%/24.5%

  • Mortgage Finance/92.1%/17.3%

  • Insurance Brokers/89.2%/4%

  • Banks - Diversified/88.7%/26.3%

  • Biotechnology/86.3%/258.9%

  • Credit Services/84%/22.5%

  • Capital Markets/83.7%/11.9%

  • Asset Management/81.9%/24.3%

  • Insurance - Specialty/79.4%/18.5%

Gross profit margin is the proportion of money left over from revenues after accounting for the cost of goods sold (COGS).

Net profit margin indicates how much net income (profit after all expenses) a company generates from its total revenue. Net profit margin is a better measure of a company’s success as it considers all expenses, including advertising.

Isn’t it interesting that the top 10 industries with highest gross profit margins, with the exception of one, are in the financial field? They take our money, invest it and make more money.

Biotechnology is the only industry on this list with a negative net profit margin (huge). This is probably because of the constant reinvestments in additional research.

Businesses exist to make profits. The numbers above may vary by industry, location, and size. If a business is not making a profit, then it will be forced by the economy to shut down.

So, as we watched the commercials and enjoyed the game, regardless to how much these businesses are making on the back of consumers, many of them are providing critical goods and services that we cannot do without. Love them or hate them, we need them. We can’t live with them, and we can’t live without them.

— Kojo Quartey, Ph.D., is president of Monroe County Community College and an economist. He may be reached at kquartey@monroeccc.edu.

This article originally appeared on The Holland Sentinel: Kojo Quartey: Advertising and profit margins — who’s making money?

Advertisement